Death to 55% – our take on this morning’s announcement


MON, 29 SEP 2014

With the general election on the horizon George Osborne makes his pitch to middle England with the removal of the 55% special lump sum death benefit charge from April next year. The detail so far is scant. At present the 55% charge applies to lump sum death benefits paid from crystallised funds and from uncrystallised funds where the member dies on of after age 75. What is clear is that this charge will no longer apply, but the tax treatment of the pension funds on death of the member pre and post 75 will still differ. This is our interpretation:

• On death of the member on or after 75 a beneficiary will be able to draw down the remaining fund taxed at their marginal rate of tax. However, if the fund is paid as a lump sum the tax rate is 45% (marginal rate from 2016/17). Where the member dies before age 75, and regardless of whether the pension fund is crystallised or uncrystallised, a beneficiary will pay no tax on the fund they receive where it is accessed through flexi access drawdown or paid as a lump sum.

• A dependant’s annuity or dependant’s scheme pension will continue to liable to income tax at the recipient’s marginal rate of tax.

• The taxation of other lump sum death benefits e.g. pension protection lump sum death benefit, annuity protection lump sum death benefit, defined benefit lump sum death benefit will be tax free where the member dies before age 75, and taxed at 45% (marginal rate from 2016/17) where the member dies on or after age 75.

• The new tax treatment will apply to payments made on or after 6 April 2015, rather than on deaths on or after 6 April 2015. This opens up the possibility of delaying payment of death benefits in order to access the more favourable treatment. Be aware that certain lump sum death benefits must be paid within 2 years of the scheme administrator being notified of the death of the member in order for these to be authorised payments.

As with any change in pension tax legislation the devil is always in the detail. But on first glance this looks like it provides fantastic tax planning opportunities and a means of preserving wealth way beyond what we could ever have predicted. The winners will be those platforms which offer flexible drawdown solutions. But it is a further nail in the annuity coffin, which is regrettable.