On the 18 July 2023 the Government presented a new policy paper setting out plans from the 2024/2025 tax year and how the allowance would be removed completely.
There has been speculation over these changes, and no one has a definitive understanding of how the changes will work until the final bill reaches Royal Assent.
In a previous article earlier this year, we talked about changes to the Lifetime Allowance.
Lovewell Blake Financial Planning Limited (LBFP) believe there is one key area of discussion, which has raised questions from our clients.
Pre and post age 75 deaths benefits
Today, an individual can gift unused pension savings to their choice of beneficiary. Before age 75 benefits are tax-free. There is no tax deducted on lump sum payments, or income. After age 75 the recipient will pay tax at their marginal rate of income tax.
From 6 April 2024 the Government plan to remove the distinction between pre and post age 75 rules, so all death benefits will be taxable at the recipient’s marginal rate of income tax.
Articles have surfaced following the announcement indicating this to be a significant change in pension legislation. While this is true, LBFP do not see this as a negative impact on retirement savings.
Pensions allow tax relief on contributions made and tax-free cash at retirement. The tax-free cash limit set at 25% of the pensions value up to £268,275. Once used, any income will be taxed at the pension owner’s marginal rate of income tax.
The new policy paper shows that in the hands of a named beneficiary, income tax will still be deducted in the same way.
While unfortunate, this should not deter anyone from saving into a pension as almost all pension savings are free from Inheritance Tax (IHT) on death and can present as a valuable inheritance tax planning tool.
As a result, the value of pensions continues to be significant in an individual’s overall wealth and legislation changes should not be over analysed before the final facts are known. With the continued support of a Financial Adviser, beneficiaries can benefit from valuable tax planning and ultimately take advantage from the gift left to them - taxed or untaxed.