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DC pension flexibility: government announces changes to taxation of lump-sum death benefits
Practical Law UK Legal Update 1-582-9471 (Approx. 3 pages)
DC pension flexibility: government announces changes to taxation of lump-sum death benefits
by Practical Law Pensions
| Published on 30 Sep 2014 • England, Scotland, Wales |
HM Treasury has announced changes to the taxation of lump-sum death benefits as part of its wider reforms to the tax treatment of defined contribution (DC) pensions.
The Treasury has announced changes to the current 55% special lump-sum death benefits charge that applies when certain lump-sum death benefits are paid from a registered pension scheme. Currently, the charge applies to a range of death benefits including those paid from uncrystallised funds (in relation to a member who dies after reaching age 75) and drawdown pensions (in relation to a member who dies at any age). The charge also applies to lump sums paid from DB schemes, for example under a five-year guarantee.
It appears from the Treasury announcement that the new regime applying from April 2015 will be as follows:
- If an individual dies before reaching age 75, there will be no tax charge on lump-sum death benefits paid from a drawdown pension or uncrystallised funds to a nominated beneficiary. The beneficiary will be entitled to withdraw the funds free of tax in lump-sum form or through flexi-access drawdown.
- If an individual dies after reaching age 75, his nominated beneficiary will be entitled to draw down on lump-sum death benefits from a drawdown fund or uncrystallised funds, paying income tax at his marginal rate. Alternatively, the beneficiary will be able to make lump-sum withdrawals. For the 2015/16 year, these will be subject to a tax charge of 45%. From 2016/17, the Treasury intends to apply marginal-rate tax to lump-sum payments too (in place of the 45% rate), but it will consult with the industry before finalising the details.
- No changes are being made to the taxation of lump-sum death benefits from scheme pensions or annuities.
According to Money Marketing, the special lump-sum death benefits charge will also no longer apply to an annuity protection lump-sum death benefit or pension protection lump-sum death benefit paid following the death of an individual before he reaches age 75, though this is not stated in the Treasury announcement.
The necessary legislative changes will presumably be implemented in the Taxation of Pensions Bill that is due to be introduced into Parliament this autumn. For more information about the April 2015 reforms, see Practice note, Accessing DC pension savings: tax reforms.