The government is to abolish the 55% death tax charge meaning savers will be able to leave more of their money to their children.
The change will take effect from April 2015 alongside the reforms outlined in the Budget.
The new rules mean that when an individual under the age of 75 dies they will be able to give their pension pot to any beneficiary tax free, including if the pension is already in drawdown. There will be no tax when it is passes on and the beneficiary will not pay any income tax on the money they withdraw from the pension.
Beneficiaries will be able to access pension funds at any age and the lifetime allowance, currently £1.25million, will still apply.
The new rules are due to come into force in April 2015, however beneficiaries of anyone who dies before that date can still benefit as long as payment is made after that point.
John Quaif, Independent Financial Adviser at Choice says “This announcement is great news for clients and opens up some good financial planning opportunities too.
For example, clients could now look to use their pension plan as a means of reducing their liability to inheritance tax. We already knew that the ‘need to buy an annuity’ at retirement was being removed. Now that benefits remaining in pensions can be passed on to beneficiaries upon death without the 55% tax charge, the pension has now becomes a very viable and tax efficient estate planning vehicle as well as an income vehicle in retirement.
Contributions to pensions currently receive tax relief at the investor’s highest marginal rate, but will now only be taxed on death at the beneficiaries marginal rate -which could be considerably lower. For example, A higher rate tax payer could receive 40% tax relief on their contributions and if their beneficiary was a Basic Rate Taxpayer, they would only pay 20% on the amount received. As pension assets do not form part of your estate for inheritance tax purposes this would also escape the 40% inheritance tax charge”