Autumn Statement – pensions


MON, 08 DEC 2014

Detail is still scant but this is what we know so far on the new pension changes outlined in the Autumn Statement.

A member taking benefits from a money purchase arrangement can use their pension fund to buy a joint life annuity. On the death of the member income from the annuity continues to be paid to the second life. Under current rules the second life must be a dependant. It would appear that as from 6 April 2015 the second life can be a beneficiary. A dependant is a beneficiary but not vice versa. Where the member dies before attaining age 75 future income payments to the recipient will be tax free provided the recipient has received no income payments prior to 6 April 2015. Where the member has attained age 75 at date of death any future income payments from the annuity will be subject to income tax at the recipient’s marginal rate.

Where the funds of a member are used to buy an annuity for a dependant/beneficiary following the member’s death, how are the income payments from the annuity taxed? This is unclear, as the annuity purchased is single life and not joint life.

We spoke to the HMRC Policy Team to get more information on this. Apparently, the intention is for the tax treatment (including testing against the lifetime allowance) of annuity payments following the death of an individual to broadly mirror the treatment of income withdrawals under drawdown following death. The legislation needed to give effect to this will be contained in the Finance Bill 2015 and it’s anticipated that the draft clauses will not be in the public domain until the New Year at the earliest – so we’ll just have to sit tight for now.

It is also possible for a member to use their pension fund to purchase an annuity with a guarantee period i.e. income payments under the annuity continue until the member dies or until the end of the period if later. As above the age of the member at date of death, and date of receipt of the first income payment, will dictate how any remaining income instalments are taxed.

Certain lump sum death benefits are subject to the special lump sum death benefit charge. An earlier announcement confirmed that the rate of the charge will be 45% where the lump sum is paid after 5 April 2015. The statement confirms that the charge will levied at the recipient’s marginal rate on payments made on or after 6 April 2016.

Following informal consultation, the age limit of 75 for tax relief on personal contributions will remain.

No doubt in the coming days and weeks more detail will be made available, when it is we’ll cover in-depth what it means for you and your clients in future Tech Talks.