The Government’s plans to scrap the 55% tax rate levied on unused contribution pensions assets that are passed on death could benefit inheritance tax (IHT) planning.
From April 2015, pension savers will be able to nominate a beneficiary to inherit their pension if they die. If they die before the age of 75, there will be no tax to pay on the inherited pension cash and if death occurs at 75 or above, the person inheriting the pension money will pay only their own marginal, or highest, rate of income tax.
The new rules are likely to have very significant financial planning implications, particularly as a means to avoid inheritance tax (IHT).
With the 55 per cent tax rate abolished, putting surplus cash into a pension is likely to become more attractive as a way to reduce inheritance tax bills, particularly as rising house prices push the value of an increasing number of estates above the £325,000 threshold at which IHT become payable at 40 per cent.
Up to the age of 75, passing on a pension will carry no tax liability – whereas other assets, like money in shares or savings accounts – will be liable for IHT. Currently any assets worth more than £325,000 are taxed at 40% when passed on.
Even pensioners beyond the age of 75 with defined contribution pension assets are only likely to pay 20% income tax on the money they receive from a pension fund – far less than IHT.
It means more pensioners are likely to put as much as they can into a pension pot up to the lifetime limit of £1.25 million.
It is likely that the announcement will bring tax benefits to around 320,000 people who retire each year with defined contribution pension savings.
For more information on the proposed pensions changes and inheritance tax planning contact Steve Vickers, Tax Partner on T: 0114 251 8850 or email: steve.vickers@hartshaw.co.uk.