HMRC Abolishes Tax on Death on Pensions
Osbourne has abolished the tax on death for pensions in the UK. The old 55% rate of tax on death is now gone…. Or has it?
Under the new rules, if you choose to die under the age of 75, there is no death tax and your pension can be passed on to your loved ones with no death tax, but if you inconsiderately wait until after 75, your next of kin would still have to pay the highest marginal rates of income tax on your pension if it is passed on in drawdown, which is 20% – 45%.
If beneficiaries instead want to take a lump sum on death, they will be charged a flat rate of 45%. This is still better than the 55% death tax which was imposed prior to April 6th, 2015, but if you are an expat living offshore, you can avoid these taxes altogether by transferring your pension to a Qualifying Recognized Overseas Pension Scheme (QROPS).
Here is a quote from the government’s website:
“Around 320,000 people retire each year with defined contribution pension savings; these people will no longer have to worry about their pension savings being taxed at 55% on death.”
As Mark Twain says, “There are three kinds of lies: lies, damned lies and statistics.”
In effect, HMRC is correct, the tax on death has gone. In reality, a tax will still be paid by the beneficiaries, even before 75.
Sure, before 75, there is no death tax, but given life expectancy for the average man is 82.5 years for females and 78.5 for males (2010), beneficiaries can expect a tax on death to still apply.
This affects defined contribution pension schemes. Defined benefit schemes can also take advantage of the new rules by either moving to a DC scheme, which the government now allows or alternatively, they can move straight to a QROPS as long as it is a private sector final salary scheme (public sector pensions will not be allowed to transfer after April 2015, so last transfers should be in by the end of November 2014 at the latest to get the paperwork accepted).
For British expats who are retiring overseas, effective planning is still needed to avoid any tax on death and to avoid UK income taxes. Here are some of the main changes below.
New QROPS vs New UK Pension Rules 2015
Lump Sum Allowed 25% 30% 30%
Income tax 20% – 45% 2.5% 0%* (in most EU cases)
Tax on Death under 75 0% 0% 0%
Tax on Death post 75 up to 45%** 0% 0%
Lifetime allowance £1.25m No max No max
*Tax in Malta strongly hinges on the Double Taxation Agreements that exist. In Europe, normally the income is paid out gross. For other countries, tax can be between 15% and 35%. Please email us to find out for which countries a zero rate applies.
**Tax is paid at the highest marginal rate of income tax which currently stands at between 20% and 45%. Beneficiaries can also choose to receive a lump sum instead at a flat rate of 45%.
Policy Cost of Changes
The government figure this policy which will be scored at the Autumn Statement is expected to cost around £150 million per annum. I think they have massively underestimated? Why? People will take higher annual pensions and run out of money quicker.
Why? Because they can. As an adviser, I can tell you people nearly always ask for the maximum pension income. This new policy means pensioners will likely run out of money quicker, that means more paid out in benefits at a later stage and likely more paid out to the NHS as expats return home earlier with their private pensions maxed out.
When Will the New Changes Take Place?
The new changes will take effect in April, 2015 and will affect both DC and DB pension schemes in the UK.
Brits who intend to move overseas should seek advice as to whether keep their pensions where they are, move to a UK SIPP or move to a QROPS. Specialist advice is needed. QROPS Specialists can ensure that you get a free pension transfer analysis.Great, No More Tax on Death on UK Pensions…. Or is there? by Richard Malpass