Good news for pension savers as the Chancellor announced the removal of the widely criticized 55 per cent “death tax” that currently applies to lump sum death benefits paid from drawdown pensions.
From April 2015, if someone has a pension in drawdown, and they die before age 75 their pension will pass to their nominated beneficiaries completely free of tax. If they are over 75, the recipient will be able to draw the pension which will be taxed as income or, if they want to get the whole pot as a lump sum they will have to pay a 45 per cent tax charge. This news will be particularly popular for unmarried pensioners if they want to leave their pension to a partner or to their children.
This move follows the historic changes unveiled in the 2014 Budget. During the budget announcement the Chancellor confirmed, from April 2015 there will no longer be restrictions on how individuals draw personal pensions and people will be able to draw their pensions with complete flexibility, however they choose.
For those approaching retirement the new flexibility and reduced tax charge make drawdown an even more attractive option compared to annuity purchase. However, drawdown will not be appropriate for everyone, for example, where someone has a pension that benefits from guaranteed annuity rates they may be better taking the annuity on offer from their provider. And in the majority of cases, if you want to access your pension via drawdown, this won’t be possible within your existing pension, you will have to transfer it to a new plan.
Many clients first come to me when they are approaching retirement and the majority have several different pensions with different providers. The first stage is understanding the client’s needs – how much income do they need? Do they have any other income such as rental income or money from a final salary pension? Do they need a lump sum now? Do they have other savings or investments which we need to consider? Each person’s circumstances and pension contracts are different, which is why it’s so important to get personalised advice. Drawdown is a complex area and individuals should always seek independent advice before entering any commitment.