MSE News: Pension inheritance tax to be axed

Chancellor George Osborne has announced he will abolish a 55% penalty tax on passing on pension pots...
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Pension inheritance tax to be axed

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  • JCLJCL Forumite
    574 Posts
    Debt-free and Proud!
    This is fantastic and long overdue news. The Coalition have done some great work on pensions reform in my view and the new freedoms put far more control with the person saving. It's up to us to make sure we use it responsibly.
    MFW 2015 #41 = £20,515/£20,515
    MFW 2014 #41 = £26,100/£25,000
    MFW 2013 #41 = £10,000/£10,000
    Original MF date = May 2036 - MF achieved on 15 June 2015
  • absolutely fantastic news. It means that I don`t have to withdraw more then we need, just to squirrel some away for the children. It will help our children in the future. Wonderful speech today
  • MartinW6MartinW6 Forumite
    74 Posts
    Eighth Anniversary 10 Posts Combo Breaker
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    My father passed away in April and left a substantialprivate pension. My mother decided todrawdown a lump sum the following month, thus incurring 55% tax. Is there any way in which she can claw someof the money back? Whilst I canappreciate the abolishment of this 'Death Tax' will help others in the future,it's a bit galling that if mum had decided to drawdown next April, she wouldn'thave paid thousands. upon thousands I'm guessing thatthe situation is irretrievable, but considering what she's 'lost', I thought itwould be worth at least asking the question...
  • kidmugsykidmugsy Forumite
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    MartinW6 wrote: »

    My father passed away in April and left a substantialprivate pension. My mother decided todrawdown a lump sum the following month, thus incurring 55% tax.

    I'm surprised by that. Were they married? Had he nominated her to get the money on his death? If the answer to both of those is "yes" then it's my understanding that an uncrystallised pension should go to her free of all tax; a crystallised pension becomes hers but with withdrawals exposed to normal income tax.
    Free the dunston one next time too.
  • MartinW6MartinW6 Forumite
    74 Posts
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    kidmugsy wrote: »
    I'm surprised by that. Were they married? Had he nominated her to get the money on his death? If the answer to both of those is "yes" then it's my understanding that an uncrystallised pension should go to her free of all tax; a crystallised pension becomes hers but with withdrawals exposed to normal income tax.

    They were married, yes. James Hay, who dealt with my dad's pension, sent mum a letter explaining that she had two options; to cash-in (crystalise?) the privately invested pension (and incurr 55% tax) or keep it running. I'm not too sure about the ins-and-outs of the pension itself, and dad indicated that mum should receive 90% of it, but I'm presuming that James Hay knew what they were doing when they said that she was liable to 55% tax. Is it worth querying with them?

    If the 55% tax was correct, does my mum have any options here, or does she have to swallow the hit?
  • dunstonhdunstonh Forumite
    109.7K Posts
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    My father passed away in April and left a substantialprivate pension. My mother decided todrawdown a lump sum the following month, thus incurring 55% tax.

    Why did she not draw some as income?
    Was the plan already in drawdown on death?
    Is there any way in which she can claw someof the money back?
    No.
    Whilst I canappreciate the abolishment of this 'Death Tax' will help others in the future,it's a bit galling that if mum had decided to drawdown next April, she wouldn'thave paid thousands. upon thousands I'm guessing thatthe situation is irretrievable, but considering what she's 'lost', I thought itwould be worth at least asking the question...

    Such is life. It should be noted that the death benefit changes were proposed before your mother chose to do the transaction. Whilst a figure was not set on it, they did say it would be reduced and early indications did hint that it would be the marginal income tax rate. So, there was enough information to suggest she would pay less.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • MartinW6 wrote: »
    They were married, yes. James Hay, who dealt with my dad's pension, sent mum a letter explaining that she had two options; to cash-in (crystalise?) the privately invested pension (and incurr 55% tax) or keep it running. I'm not too sure about the ins-and-outs of the pension itself, and dad indicated that mum should receive 90% of it, but I'm presuming that James Hay knew what they were doing when they said that she was liable to 55% tax. Is it worth querying with them?

    Sounds like your late father's pension was already in drawdown and she chose to take it as a lump sum, therefore a 55% tax charge applied. Why did she not seek advice at the time particularly as it was a "substantial" pension fund? She could have continued to draw the income subject to her own income tax rates which are far lower than a 55% charge (and she may have to pay income tax on the lump sum if it generates income now).
    If the 55% tax was correct, does my mum have any options here, or does she have to swallow the hit?
    Unfortunately there isn't much that can be done now. The tax rate is correct on the option chosen.
    Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.

    Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.
  • SallyGSallyG Forumite
    850 Posts
    "Spouses and financially dependent children under the age of 23 are already exempt from the 55% tax, but the new policy introduces the following changes:
    When the deceased is 75 or over, beneficiaries will only have to pay their marginal income tax rate, and only when they take money out of the pension. There will be no restrictions on how much of the fund can be withdrawn at any one time.
    Tax-free access to the pension pot of those who die under 75, to any beneficiary, including if the pension is already in "drawdown", meaning income has been drawn from the fund while it is still being invested."

    Why age 75 threshold?
  • SallyG wrote: »
    "Spouses and financially dependent children under the age of 23 are already exempt from the 55% tax, but the new policy introduces the following changes:
    When the deceased is 75 or over, beneficiaries will only have to pay their marginal income tax rate, and only when they take money out of the pension. There will be no restrictions on how much of the fund can be withdrawn at any one time.
    Tax-free access to the pension pot of those who die under 75, to any beneficiary, including if the pension is already in "drawdown", meaning income has been drawn from the fund while it is still being invested."

    Why age 75 threshold?
    Traditionally 75 was the latest age that an annuity had to be purchased by, which of course has not been the case now for many years. But many tax rules surrounding pensions still hinge on age 75. So the latest change will partly change this for uncrystallised funds and over 75.
    Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.

    Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.
  • SallyGSallyG Forumite
    850 Posts
    Thanks - I caught parts of the speech - he seemed to say all deceased's pensions handed on tax free and immediate effect - just dreaming.........
    About this in the Independent:
    Ros Altmann, a pensions expert, said
    “Those who inherit pension funds can choose to keep it as a tax-free pension, ...."
    could I will it to be split equally between my two children?
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