The policy announcement by Chancellor George Osborne, that pensions will become transferrable under certain circumstances means that Christmas has come early for those with a pension pot that they are not going to exhaust during their lifetime.
Whilst the details of the proposal is not yet clear, this dramatic change in taxation will be of more than passing interest to those who advise families.
It appears that the proposal has two main elements that will be important.
The first is that any funds passing to a spouse will be exempt from tax. This will mean a widow can continue drawing a pension at the same rate as her deceased spouse. It may also allow her to pass on non-pension assets during her widowhood.
Secondly, where the pension fund does not pass to a surviving spouse, the fund will be taxed at the Income Tax rate of the beneficiary – that is to say either 20% or 40%.
This is probably good news for the grandchildren of the pension fund owner, as it will make sense to pass money down to that generation, who have a full tax allowance and will only pay 20% on the balance of the fund.
Mr Osborne’s idea ignores the fact that money going into pension funds gives tax relief to the individual and the fund rolls up tax free, hence the 55% rate on exit.
On the face of it, this proposal is good news for those who have been prudent and built up a decent pension pot. However, caution is recommended. This is only a pre-Election puff and may suffer the same fate as the suggestion five years ago to increase the nil-rate band to £1 million per person. We are still waiting for that to become law.
Whilst the Chancellor’s proposal is to be welcomed, there is one minor hitch, namely that his party has to win the General Election in May 2015. Thus, this proposal is as likely to become law as Labour’s plan for a Mansion Tax on terraced houses in certain parts of London. Taking action based on pre-Election rhetoric is not recommended or advised, especially as neither idea seems to have been properly thought through.
If you require any further information about these topics, please contact a member of the Edwin Coe Private Client team.
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