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Tax treatment of death benefits from pensions arrangements

December 2014

Currently, many lump sum death benefits payments from a pension scheme will attract a tax rate of 55%. This will change from April 2015.

The government has recently announced that the tax treatment will change so that from 6 April 2015:

  1. If an individual dies before reaching 75 there will be no tax charge on certain lump sum death benefits paid to a nominated beneficiary.  This beneficiary can take the funds free of tax either as a lump sum or through a special form of income drawn down.  Furthermore, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free.
  2. If an individual dies after reaching age 75, there will be an amended tax rate for certain lump sum death benefits.  The beneficiary can take the income as an annuity or drawdown and pay tax at his or her marginal rate as under the current legislation.  Alternatively, the beneficiary can make lump sum withdrawals.  At present, these lump sums will be subject to a tax charge of 45% although it is anticipated that from 2016/17 the tax rate will be amended to reflect the marginal rate of the beneficiary. 

These changes do not apply to death benefits payable in the form of dependants' pensions or annuities (with the exception of the joint life or guaranteed term annuity mentioned above).  These will continue to be taxed at the beneficiary's marginal rate. 

These reforms apply to payments made on or after 6 April 2015 rather than to deaths on or after that date.  Therefore, beneficiaries will be able to ask scheme administrators to delay making payment for deaths occurring before 6 April 2015 if they wish.  Please remember that any lump sum payment must continue to be paid within two years of the date of the administrator's notification of the member's death to count as an authorised payment.

This is a short summary of complex legislation.  It should not be taken as specific legal advice.  For further comment please speak to your normal Wrigleys' adviser.

If you would like any further information, please contact Rebecca Cooke on 0113 244 6100.

You can also keep up to date by following Wrigleys Pensions team on Twitter here

 

 

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