George Osborne has announced in his speech at the Conservative Party Conference in Birmingham, that the 55% inheritance tax levied on defined contribution pension pots will be abolished.
In his speech to his Conservative Party peers, George Osborne pledged that a Conservative Government would “choose the future, not the past” and asked the people of Britain to do the same. He put forward his case that the Conservatives would “raise the ambition of the nation so that everyone has the chance to succeed” and that he will “finish the job that we have started”. The cornerstone of the Conservatives economic strategy has been their ethos that the Government must “trust hard working tax payers to make their own decisions” which they proved with the massive overhaul to pensions introduced in the March 2014 Budget. But Osborne has now taken this one step further with his disposal of the “death tax”.
The final bell tolls for the “death tax”
Currently, hardworking Contractors who pay in to a pension are held to ransom by a most hated tax which prevents your children and grandchildren from inheriting the majority of your nest egg when you die. If you are under the age of 75 and are in receipt of benefits from your pension then your descendants will be forced to pay tax at their highest marginal rate if they wish to draw an income from your pension. If you are aged over 75 then that tax rate could rise dramatically to 55% of your pension fund which impacts significantly on your loved ones inheritance.
This has long been a bone of contention amongst the Contractor Community and we encounter questions on a daily basis from our Contractor clients who are concerned about their savings ending up in the tax man’s pocket rather than their children and grandchildren. Osborne recognises that this could represent the final nail in the coffin for the Conservatives in the eyes of the “grey” vote which is becoming ever more influential in an ageing Britain. He is rumoured to be hoping that his latest announcement could turn this around and swing many of the older population towards voting Conservative.
“Choose the future, not the past”
Osborne was delighted to announce that “the party that gave people the right to buy their homes now gives them the ownership of their own pension too” with his raft of “far reaching new freedoms” for how people access their pensions. Under the new rules, Inheritors will only have to pay their marginal income tax rate on pension benefits received after the death of someone aged 75 or over. They will pay no tax at all if the deceased was under 75 even if the pension had been in drawdown. Osborne proudly boasted “I could choose to cut this tax rate, instead I choose to abolish it altogether” to rapturous applause from his Conservative Peers.
This announcement was leaked to the press in advance and it was widely publicised that the changes would come in to effect next April but in a surprise twist the Chancellor announced that the changes would be “effective from today”. From our research it would appear that officially the new rule changes come in to force from April 2015 however beneficiaries in this interim period could delay their payment to take advantage. He said “Freedom for peoples pensions, a pension tax abolished, passing on your pension tax free. Not a promise for the next Government but put in topractice by Conservatives in Government now”.
The Autumn Statement is expected to define how the policy is to be funded, after the Treasury has been reviewing the tax since the Budget of this year. Estimates are that this will affect 320,000 people at a cost of £150m a year, resulting in a potential windfall of £500 per person.
This latest change to the pension landscape will have a direct impact on almost every Contractor investing in a pension today as it affects all defined contribution pensions. In fact, the only people who will not benefit will be those with a final salary scheme which some Contractors may still have from a past life in the public sector or working for a large employer. Whether you have been contributing to a pension personally or via your limited company, all contributions made since you have been contracting will be exempt from the previous 55% death tax. This will have a real impact on your children and grandchildren and makes pension investment even more appealing, not only for the tax benefits you receive today on your contributions but also on the tax benefits now available to your descendants when they inherit.
For the first time, Contractors can build up your pension fund, safe in the knowledge that there is the ability to drawdown on savings without restriction from the age of 55, but also any unused savings will be passed down to your family tax free when the time comes. This is a monumental shift in pension taxation and will equate to a real saving for each and every one of our Contractor clients.
To find out how you could benefit from the new pension freedoms contact the specialist Pension Advisers at ContractorFinancials on 0208 090 0702 or email firstname.lastname@example.org