-- Death Benefits in Income Drawdown --
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Death Benefits in Income Drawdown
Both of the new structures have a new tax treatment on death where the fund passes to the clients estate in the form of a lump sum. HM Treasury has stuck to its guns and maintained the 55% tax on the fund, on the premise that people with these funds will probably have had higher rate tax relief along the way.
On death the new options will be:
Maintenance of the drawdown arrangement for the dependent
Return of Fund with a 55% ‘Recovery Charge’ on funds held in drawdown
Full Fund pass over for the provision of a dependents pension
Return of Fund donation to charity with NO TAX
Under the proposed reforms, Inheritance Tax, (IHT), will not typically apply to lump sum death benefits after age 75.
Funds can still pass to a dependent free of this tax so long as the money is being used for the provision of income.
Most disconcerting is that death benefits for all pensions, where death occurs post 75, will be subject to the 55% tax charge. We can say this is better than before – because an annuity would have had to have been purchased, but still – this is a very high tax charge if you have never had higher rate tax relief.
Justification for the rate in the response to the consultation is stated as:
“The recovery charge will only apply in cases where an individual has unused pension savings remaining upon death. Typically this will occur where that individual has been in a drawdown arrangement. While many individuals will move between different income bands over their working life, HMRC estimate that around 75% of individuals currently in drawdown will have received most of their tax relief at the higher rate.”
We expect this to be an issue that will receive further challenge, because for the ‘ordinary person’ the message must now be – Good news you don’t have to buy an annuity when you get to age 75, bad news is that if you die after 75 your beneficiaries can only have the money with a 55% tax charge!
Serious Ill Health Lump Sums
The proposals introduce the payment of a lump sum, equating to a return of Fund, when serious ill health is diagnosed. As with the Death Benefit scenario this benefit is subject to the recovery charge of 55% when the person is over 75 years old. Importantly this does not apply before 75.
