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Tory Autumn Conference 2014

View profile for Minesh Patel
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George Osborne is continuing the coalition’s pension revolution with the latest proposal being to remove the tax on lump sum death benefits on pensions. This comes hot on the heels of a complete liberalisation of the way we may all draw our pensions in future, including the opportunity to effectively draw our pensions in whatever way we see fit.

From April 2015, pension holders who die having previously taken a lump sum from their pension pot, but left the rest of the pension fund invested, will no longer leave a lump sum death benefit which is first taxed at 55%. Alternatives for surviving spouses or dependents receiving a lump sum still exist including being able to continue drawing income from the same pension fund, or converting the rest of it into a lifetime annuity.

For most however, receiving a lump sum death benefit will remain the preferred option, particularly if there are debts outstanding. A word of warning though for anyone receiving a lump sum who then wishes to pass that sum on to the next generation. Although pension lump sums won’t be taxable when passed on to surviving spouses, if not spent first, they will be added to the taxable estate when the surviving partner eventually dies.

Remember that the home and a lifetime of pension savings (remember that children can hold pension assets too) form the bulk of most people’s personal wealth. Husbands and wives will have pension savings in their own right, and with the favourable tax treatment on contributions, the size of an individual’s pension pot can grow incredibly quickly. Once an individual’s ‘nil rate band’ exemptions are used up, Inheritance Tax which usually falls on the children to pay is chargeable at 40%.

One straightforward piece of financial planning which can reduce the burden of inheritance tax on the next generation is to alter the nominated beneficiary for pension death benefits, in favour of a ‘spousal bypass trust’. Usually, when someone starts a pension plan, they are asked to nominate someone to whom they wish their pension benefits are to be paid on death, and that someone is typically the spouse.

Using a spousal bypass trust in place of a nomination of beneficiaries for pension lump sum benefits can provide an effective solution to a potential inheritance tax problem, AND STILL allow the surviving spouse to benefit in the form of a right to withdrawals from the fund while they are still alive.

Call Minesh Patel of EA Financial Solutions on 020 8446 3231 for further details on how more of your wealth can be passed to your loved ones.