The announcement by George Osborne yesterday (29/9/2014), that a tax on pension funds is to be scrapped is a major giveaway for investors. It would seem we are already into the 2015 election campaign.
At present anyone holding a SIPP (the most cost effective way to hold your pension fund) or other defined contribution pensions (e.g. personal pensions), faces a hefty tax bill when they die after the age of 75, or earlier if the fund is already in “drawdown”, i.e. paying out to the beneficiary on a regular basis). That tax applies to the balance of the fund, and may also be subject to inheritance tax. After April 2015, those taxes will not apply and the fund can be transferred tax free – only when money is taken out by the inheritor will it be taxed as income at the recipients normal tax rate. This is exceedingly generous because it will enable substantial sums to be sheltered from inheritance tax, and pass down the generations tax free. It will encourage wealthy investors to put more into their pension funds for that reason.
At least the above attempts to provide a simple explanation of the current and future system, but in reality it’s more complex than that. Anyone considering their future tax position and the position of their beneficiaries is advised to take expert advice on this area and study the details of the new rules when they become available.