Incoming pensions tax rules could allow savers to avoid paying a death tax charge on their unused savings, according to experts.
The draft Taxation of Pensions Bill, which will enshrine in law the pension freedoms announced in this year’s Budget, introduced a new way of taking pensions savings which will sit alongside annuities and drawdown.
The so-called unsecured fund pension lump sum (UFPLS) will allow people to draw a lump sum from their pension without having to crystallise the whole pension pot. Of the lump sum they withdraw 25% will be a tax free lump sum and 75% taxed at the individual’s marginal rate. However, the annual allowance for anyone taking a UFPLS will be reduced from £40,000 to £10,000.
Currently there is a charge on death of 55% on crystallised funds, which those using UFPLS would avoid, though the level of the death charge is under review and changes will be announced in this year’s Autumn Statement.
By entering drawdown (known as flexi-access drawdown under the new regime) the entire fund is crystallised but it is possible to take 25% of the entire fund as a tax free lump sum, and so long as no income is taken, those in flexi-access drawdown can keep their £40,000 annual allowance.
If savers take income then the annual allowance will be cut to £10,000 for those in flexi-access drawdown.
For some people it will be more advantageous to us a UFPLS than enter drawdown.
For a full breakdown of the new pensions tax regime, click here.
Adrian Walker (pictured), retirement planning manager at Old Mutual Wealth, said people with a short life expectancy might be better off with a UFPLS.
‘What you want to do with your pension may be different from me. I may drink and smoke and my life expectancy may not be as long so I might want to take the income out and leave as much as possible for the wife and kids. If that is the main priority then I will take income in the most tax efficient way [through UFPLS] and leave as much as possible without the government taxing the hell out of it,’ he said.
David Robbins, senior consultant at Towers Watson, agreed with Walker but highlighted that many would want to kept the £40,000 annual allowance.
‘From a death benefit point of view there would be advantages to it [UFPLS] but for someone expecting to stay in work keeping the £40,000 annual allowance will be important. If you have no personal allowance left and are a 40% tax payer then being able to make £40,000 tax free contributions would be important.’
Claire Trott, head of technical support at Talbot and Muir, said: ‘It all depends on your circumstances; those persons who want to protect their death benefits will want UFPLS, but if you have no children to pass the pension on to our have a spouse who you expect to transfer it to after death, because they will be able to take income without paying a death charge anyway, flexi-drawdown would be preferable.’