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article imageOp-Ed: What the new ruling on pension taxes means for your inheritance

By Jenna Cyprus     Nov 4, 2014 in Business
For UK workers and their families, how they save and bequeath money to heirs has changed dramatically over a relatively short period of time.
Until recently, the restrictions and tax penalties related to pensions have made them unattractive for many workers.
However, a March 2014 budget measure and a new proposal appear to impose major positive changes on the formerly “restrictive and unattractive” system, according to Richard Dyson. When Chancellor George Osborne recently revealed plans to scrap the 55 percent tax rate on pension funds after death, he may have unknowingly encouraged thousands of soon-to-be retirees to evade inheritance tax.
Let’s take a closer look at the decision and what it means for inheritance tax.
So far, 2014 has caused significant changes for savers and their families when they get access to their retirement funds. In March, Chancellor Osborne unveiled a new budget plan that allows individuals complete discretionary access to such funds.
Previous policies had required savers to purchase annuities that had little value for their owners, but the new budget gives them the prerogative to withdraw cash as they need it. Osborne’s new proposal, going into effect this coming April, will take pensioners’ benefits to a new level.
Although current government policies heavily tax any funds a deceased individual passes on to family members, the proposal reverses these taxes. Individuals who participate in pension plans now face several positive changes, including:
Abolishment of the 55 percent tax rate on pension pots. As of April 2015, when pensioners pass away, their loved ones will no longer face the “punitive” tax rate they once had to pay out of their inheritance.
Freer access to retirement funds. Individuals with retirement funds invested in the stock market may now withdraw cash whenever they need it, rather than having to purchase an annuity that may yield lower payments than desired.
Advantage for those who utilize pensions rather than bank accounts. Because bank funds will continue to be subject to a 40 percent inheritance tax, savers will benefit more from transferring their money to pensions.
Currently, when an individual under the age of 75 passes away, the funds he or she leaves to the family from an unspent pension are not subject to taxes. The 55 percent rate applies only to the families of those who die at over 75 years old.
However, the new proposal extends the same tax benefit to heirs, regardless of the age of their loved one at death. So here’s what the new rules mean for inheritance taxes.
For UK workers and their families, the new regulations offer a high reward for keeping funds in pensions. According to the Daily Mail, pensioners “could avoid paying inheritance tax for generations” by transferring funds from the bank to retirement accounts.
Over several decades, the sums families save and pass to future generations could be quite substantial.
Apart from bank accounts, final salary pension schemes are likely to witness a mass exodus. These pensions once offered the largest payouts, but they included limitations on whom the holder might pass the money to. Typically, immediate family members can be the only beneficiaries of such plans.
Another disadvantage of final salary pension schemes is the 20 percent income tax the recipients must pay on earnings. In the past, this represented a better savings than the marginal tax rate they would have to pay for funds from a drawdown account.
Families have some new considerations to weigh under the new budget. Osborne’s proposal places workers and their families on an equal footing when it comes to using retirement funds.
Regardless of who has access to the money, the choices remain the same: You may accept regular payments or make larger withdrawals as needed and pay income taxes at the “highest marginal rate.”
This new dynamic gives families better options for planning their savings and wealth management over several generations. Smart savers may utilize strategies such as:
Topping up pensions. Rather than putting minimal amounts into pension savings and the rest in bank accounts, or giving money directly to family members, workers will benefit from putting the maximum amounts into their retirement accounts.
While they’re still working, people who contribute to retirement funds also receive a certain percentage of tax relief: about 40 percent. Previously, this would be cancelled out by the tax rate beneficiaries would pay after the saver’s death, but that’s no longer the case.
Transferring existing savings. Individuals may rush to move their cash into new retirement schemes (such as from professional to personal pensions) to avoid having to pay a tax.
The effects the new rules will have on pensioners and their families will vary depending on their incomes and how much they have saved. Contribution limits will play a role for those who generate large amounts of wealth.
However, for individuals who take full advantage of Osborne’s new policies, the tax gains to themselves and their loved ones could reverberate for generations to come.
How will this change to the pension system affect your approach to retirement?
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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