NEW PENSION RULES GIVE OPPORTUNITY FOR INHERITANCE TAX PLANNING
New pension rules which are due to apply from April concentrate on the opportunities for pensioners to make withdrawals from their pension pots as they please. However, the new pension rules also offer the opportunity to pass on family wealth without paying Inheritance Tax (“IHT”).
The current rules are that if you die before making any withdrawals from your pension pot, whatever is in the pot can go to your beneficiaries tax free. When you start taking a pension (and you must do so by the age of 75) then you can have up to 25% of the pot in your own hands tax free. For most people, the rest of the pot must be used to buy an annuity and although many annuities guarantee to pay out for a minimum period, there is nothing to pass on to their family.
All this is now changing. With effect from 1st April 2015, there is no obligation to take a pension when you get to 75 and you will be able to use your pension like a bank account with the option to take either the whole lot out at once or small sums at regular intervals. When you want to take a pension, you can withdraw 25% of the pot tax free as now.
You can then make any further withdrawals you wish, up to the whole value of the fund, but you will pay income tax on those withdrawals at your marginal rate i.e if you take all of your pension savings at once, the remaining 75pc will be taxed at your usual rate of income tax.
If you die below age 75, whether you have been taking a pension or not, whatever is in your pot at death can pass to your family tax free. If you die after the age of 75, then whatever is in the pot can go to your family tax free but if they take out the pot as a lump sum then there is a tax charge of 45%.
Alternatively, your nominated beneficiaries can make ordinary pension withdrawals from the funds (once they have reached the age of 55), and pay income tax on those withdrawals in the ordinary way.
The effect of these changes is to make pensions very attractive as part of your IHT mitigation strategy. You will get income tax relief on the payments in, and have access to the funds once you reach 55. If you die before 75, the remaining funds can go to your family tax free and if you die after 75 then your beneficiaries can withdraw the funds in such a way as to minimise the tax.
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