New rules for passing on a pension on death
A pension pot can now become a family asset to be passed on to a future generation
New rules announced by George Osborne take effect from April 2015 for defined contribution pensions (ie not final salary or state), affecting some 12 million people!
The rules differ depending on whether you die before or after 75. If you die before 75, and the pension is already being used to provide income, 55% tax is currently due, except for spouses or children under 23 who have to pay income tax on their money from the fund at 20% or 40%.
Under the new regime, no tax will be payable, whether or not the fund is being used for income (subject to £1.25m limit on the size of pot).
Currently, If you die after 75, anyone inheriting the pot will have to pay 55% tax, except spouses only, who then pay income tax on the income they receive.
Under the new rules, anyone inheriting the pot will pay income tax only, at their marginal rate on the income they receive from the pension pot.
A pension pot can now be a very attractive way to pass value onto the next generation. Unlike other investments such as bank accounts or shares, there is no IHT payable and even if you are over 75 when you die, many people pay income tax at 20%, which is far less than 40% IHT!