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Tax Abolished on Inherited Pensions

2nd October 2014

The Chancellor George Osborne has announced that the current 55% tax charge on inherited pensions will be abolished from April 2015.

Inherited defined contribution (DC) pensions that have a drawdown arrangement or have not been accessed will face new tax treatment depending on the age of the owner upon their death.

A short summary of the new rules is shown below. Note: the new rules will not apply to annuities or scheme pensions.

New rules

Death before 75: DC pension pots can be passed on tax-free, whether it is in a drawdown account or untouched (provided it is taken as lump sums or taken via a flexible drawdown arrangement).

Death after 75: the beneficiary pays income tax on the pension at their marginal rate. Funds can be accessed in any way including a lump sum option which will be taxed at 45%.

The news has been generally welcomed by the pensions industry, organisations and business groups. John Cridland of the Confederation of British Industry, welcomed the changes but urged the government to do more to encourage retirement saving. "There is a real issue in the UK with people not saving enough for retirement and enjoying longer lives."

Pensions technical director at MGM Advantage, Andrew Tully, stated that savers should not assume they will be able to pass on their pension tax-free. Although these changes are good news for savers with defined contribution pensions, the reality is that the vast majority of people retiring with good health should expect to live beyond age 75. So the chances of people passing on tax-free lump sums are slim."

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