The death of 'Death Tax'

Chancellor Announces Abolishing of the 55% 'Death Tax'

UK Chancellor George Osborne Announces Abolishing of the 55% 'Death Tax' on Inheritance of Pension Funds

From April 2015, anyone inheriting money from a pension fund will not have to pay the dreaded pension inheritance tax, also known as the 'death tax.' The tax is expected to provide benefits of nearly £150 million every year to families of pension account holders.

Present rule

Under the present rule, those inheriting pension funds from their parents or grandparents need to pay a 55% pension inheritance tax. There are only a couple of exceptions to this rule.

  • There is no tax if the pension money is inherited by either spouses or under-23 children
  • There is no tax If the deceased pension account holders die before reaching the age of 75, AND they have never made any withdrawals from the pension account

To qualify for the second exception, many people end up withdrawing their entire pension amounts before reaching the age of 75. Some even end up spending more than necessary to avoid losing 55% of their hard-earned savings.

New rule

Under the new rule, inheritors of pension funds will not be taxed at 55%. Depending on the age of the deceased pension account holder, inheritors may have to pay either the marginal income tax or no tax at all.

  • If the deceased is 75 or above, inheritors have to pay a marginal tax (20% or 40% or 45%), similar to any other income, on the transferred pension funds
  • If the deceased is below 75, inheritors have to pay 'zero' tax on transferred pension funds

The new rule allows people to keep money in the pension fund for as long as they want. They can also withdraw money for their day-to-day expenses, which was not possible earlier. With this change, families can now pass on their pension pots to generations to come, without worrying about inheritance taxes.

However, this change is applicable only for 'defined contribution' pensions, or pensions in which retirement income is based on the amount set aside while working and the growth in the invested amount. This rule is not relevant to 'defined benefit' or 'final salary' or 'annuity' pensions in which you get a certain amount every year after retirement irrespective of the performance of investments.

As per the UK government, nearly 320,000 people retire with 'defined contribution' pension each year, and all of them will benefit from this change.