There have been many headlines recently about the changes to the access and death benefits of Defined Contribution Pensions from April 2015. This however, can be misleading and also confusing as the headlines offer only a caption of the reality.
We therefore thought it would be useful to expand on a few of the headlines to give you the reality that is attached:
Headline 1 regarding changes in access:
“Now dip into your pension pot when you like: Over 55s can use fund ‘like bank account’” (Daily Mail: 14 Oct 2014)
From the above headline you could think, that like drawing from most bank accounts there would be a simple transaction that would not be liable to tax however, this would be incorrect.
Actually all the changes have done is remove the cap on the amount of income that you can draw per annum when you access your pension via Drawdown. The transaction for most would still involve seeking advice and would not therefore, be like drawing from a bank account.
Also nothing has changed with regard to tax. There is still a PCLS (Pension Commencement Lump Sum) of 25% tax free with the remainder being liable to tax at marginal rates of income tax. It is all well and good to announce that over 55s can get hold of their whole pension however, what this doesn’t explain is that if they took a taxable lump sum this would incur high levels of income tax even if they had no other income.
Pension fund of £200,000:
25% PCLS = £50,000
75% liable to income tax = £150,000 gross, £96,373 net
Fund received = £146,373
Tax paid = £53,627!!!!!!
(Based on income tax rates 2014/15 and having no other income)
Headline 2 regarding changes in death benefits:
“George Osborne scraps the ‘death tax’. George Osborne will announce plans to abolish a “death tax” on pension pots saving people thousands of pounds they would otherwise have lost” (Telegraph: 28 Sep 2014)
The headline would lead most to believe that no matter what your age or your pension situation that there will no longer be any tax to pay on death however, this is not entirely true.
At the current time if you access your pension then pass away, or are over the age of 75, a 55% tax charge is payable on a lump sum or your dependent can draw an income at their marginal rate of tax. If you die and are under 75 having not accessed your pension the funds can be paid tax free if within the deceased’s Life Time Allowance.
The new rules will provide the following changes: If you die, are under 75 and have not accessed your pension, it can be paid as a tax free lump sum to any beneficiary, up to the deceased’s Life Time Allowance. If you have accessed your pension it can be paid as a tax free drawdown pension.
If you are over 75 however, the tax charge is still there although has been reduced from 55% to 45% if paid and a lump sum and to the beneficiaries marginal income tax rate from 2016/17 tax year. Therefore the ‘Death Tax’ has been scrapped for some but not all situations.
As you can see we rarely get the full picture from the headline and that’s where advice comes in to enable you to use the changes to your advantage when, all the facts and your personal situation have been addressed. The changes for some will give the increased flexibility needed however, for others the same sustainability of their funds will be required thus meaning they will not benefit from the changes at all.
This article is based on our interpretation of the guidance and other documentation available on the Treasury and HMRC websites, which cannot be guaranteed and could be subject to change.