Press Releases

November 2010

Good news on pensions as tax rate is cut

South-West chartered accountants Milsted Langdon are highlighting some rare good news for pension holders as the government announces a reduction in the tax rate charged on pension pots passed on to an individual’s beneficiaries in the event of their death.

April 2006 saw a number of changes to the rules surrounding pensions, designed to simplify the system, although these were subsequently eroded by a number of new regulations to restrict tax relief on contributions.

Steve Horton, from the firm, said “One significant change was that people got the right to pass any unused portion of their fund onto others after their death – but the tax charged on this made it barely worthwhile.

“In addition to a pension fund exit charge of 70%, the remainder was liable to Inheritance Tax (IHT) if the individual’s overall estate was large enough, meaning an overall tax take of up to 82%.

“Changes introduced by the new government have reduced the tax charged in these circumstances to a 55% exit charge and no IHT. This is still high but, given that any growth in pension funds is tax-free, it is comparable to other means of IHT planning.”

The new lower exit charge only applies to pension funds invested in ‘draw down’ schemes (not annuities), where funds remain invested and holders can withdraw money as and when needed, subject to certain limits to ensure the funds are not exhausted too quickly.

Previously, holders of draw-down schemes usually had to switch to a standard annuity by the age of 75 at the latest, but that rule no longer applies so anyone whose pension provider still insists on such a move can opt to look elsewhere.

For more information call 0117 945 2500.