Pension Fund Payout on Death FAQ
The UK government has managed to successfully con people into thinking there is no tax on death on their pensions. Well, this simply is not the case. Whilst technically, the death tax will disappear in 2015, don’t for a minute think your wife, partner or children can escape paying tax on your pension upon your demise unless you are considering popping your clogs early.
Here is a quote from the government’s website:
“Around 320,000 people retire each year with defined contribution pension savings; these people will no longer have to worry about their pension savings being taxed at 55% on death.”
The reality is that whilst pensioners can pass on their funds to their loved ones before 75, a death tax will still apply after 75. With the average age of death at above 75 for both men (78.5) and women (82.5), this means most people will still face a tax on death of up to 45%!
These new changes apply to both money purchase and final salary pensions.
What Will the Tax Be on My Pension Pot Upon Death?
What Pension Will Be Allocated to My Next of Kin Upon Death?
- In fact, even if the pension pot is passed on to your loved ones, they will still pay income tax on it at the highest marginal rate of 25% – 45% even in the event that you die before 75. After 75, they can take a lump sum at the highest marginal rate of 45% or take it at their highest MRT of income tax.
- So, whilst they avoid 55% tax on death and the gap between SIPPs and QROPS have narrowed, your next of kin will still likely pay a 45% tax on your pension pot upon death.
- A transfer to a QROPS however avoids both death tax and reduces income tax, sometimes even eradicating income tax altogether…. and there can be other reasons to transfer, such as to stabilise your income. If you are moving to Europe, it can often make sense to transfer your pension to EUR to avoid your income being moved around by changes in foreign exchange rates.
Crystallised Pension – Tax on Death
Here we go again. We have a change in pension rules and taxation in the UK… surprise! One of the main reasons to move a client’s UK Pension offshore to a QROPS was to remove the “death tax” on funds left to the next of kin.
Currently, on non-crystallised funds, “Death Tax” does not apply before the age of 75. This new measure effectively removes any tax charge on crystallised pension funds before the age of 75.
From April, 2015, pensioners who are already in drawdown or who hold uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to if they die.
- If the individual dies before they reach the age of 75, they will be able to give their remaining defined contribution pension to anyone as a lump sum completely tax free, if it is in a drawdown account or uncrystallised.
- Likewise, upon death, post the age of 75, withdrawal of funds will be taxed at the recipients’ marginal rate of tax (i.e. added to any current income) or if taken as a lump sum, taxed at 45%.
Pension Payout on Death in UK
UK SIPP – Pension – Tax on Death
Pension Payout on Death Before 75 Years Old
For pension scheme members who die before they get to 75 holding a UK defined contribution pension (e.g. Aviva private pension scheme), whether in drawdown or whether they have uncrystallised funds, any nominated beneficiaries will be able to inherit the remaining fund free of any UK tax.
This change affects only those in drawdown, where the previous tax for distributing benefits as a lump sum equalled 55%. There is no change to those with uncrystallised funds, where payment remains tax free.
The payment will be tax-free so long as it is in the form of a cash lump sum payment(s) or is taken as pension income through a flexible drawdown account.
Pension Payout on Death After 75 Years Old
- Beneficiaries will have the ability to access the remaining pension funds flexibly (i.e. no restrictions on the amount of withdrawal at any one time), and at any age, subject to tax at their marginal rate, unless the full fund is paid in its entirety as a lump sum.
- Beneficiaries receiving benefits as a full cash lump sum payment will be subject to a tax charge of 45% (a reduction of 10% on the present rate of 55%).
- The Government also intends to make death benefit lump sum payments post-75 subject to tax at the marginal UK rate in the future (as opposed to the 45% flat rate), and will engage with the pension industry to put this regime into place during 2016/17.
New QROPS 2015 Pension Payout on Death Overseas
- Zero tax on death regardless of age.
- Earlier retirement age in the case of a Maltese QROPS (50).
- Pension Commencement Lump Sum (PCLS) of 30%.
- Pension funds outside the UK will not be subject to any future UK Pension changes or political risk
- Funds remain outside the estate for Inheritance Tax (IHT).
- Assists with any intention to seek domicile outside the UK.