Changes to the taxation of Death Benefits
Since the Chancellor revealed changes for pensions in his budgets on 19th March this year, we have seen further detail for the new pensions regime. The final piece of the jigsaw has been the clarification of the taxation of lump sum death benefits and the removal of the 55% special tax charge.
The Current Position
Lump sums paid on death after age 75 are subject to a special 55% tax charge. This rate also applies to lump sums on death before age 75, where the funds have been crystallised (e.g. in Drawdown).
For dependants income paid as annuity or drawdown, tax is payable at the beneficiary’s marginal income tax rate. A specific definition of dependant applies, meaning that this option is usually relevant to widow/widower, although dependent children can benefit.
The New Position
The 55% rate of tax will be scrapped. From next April, the rate of tax on payment of death benefits from money purchase schemes will be as follows:
Death occurs before age 75, lump sum to beneficiary is tax free
Death occurs before age 75, income to beneficiary is tax fee
Death occurs from age 75, lump sum to beneficiary taxed at 45% (for 2015/2016 tax year) then proposed to be at beneficiary’s marginal rate of income tax from 6th April 2016 onwards
Death occurs from age 75, income to beneficiary taxed beneficiary’s marginal rate of income tax
We expect the full details to be clarified on the original expected date of 3rd December 2014