In the past, savers are told to put away as much as they can for retirement. They did that, and things went well until they unfortunately passed away. Their heirs would get the pension, but they would have to deal with a tax of 55 per cent. This left the heirs with substantially less than what they deserve. There have been some changes made to pensions that could allow heirs to inherit the pension tax-free.
Beneficiaries will pay any taxes based on their own income tax level, rather than the oppressive 55 per cent tax rate. If the person who passed on is under the age of 75 there will be no tax at all to pay. Another change is that the pension can be passed on to grandchildren, not just the children of the deceased.
The change was made effective since April 2015, and benefits families that would have otherwise had to pay an immense amount of tax. The previous tax scheme basically gave half the pension back to the Government, something that wasn’t a good outcome for anyone.
Keep in mind that if you’re purchasing an annuity, the rules still apply. The capital is almost always lost upon death, so keep this in mind if you’re trying to leave something behind for your loved ones.
Mr. Osborne had many reasons for changing the current law to freeing these pensions from taxes. Indeed, the push for pension freedom has come to a fever pitch across the country, with many people looking to leave as much as they can for their loved ones. From every angle, it definitely makes sense. If you’ve spent your whole life saving up for retirement and you happen to have money left over, why not pass it on to your loved ones?
The Chancellor also wants to encourage people to keep saving money in pensions, instead of going to annuities. In fact, these changes are almost certain to make annuities a thing of the past. The Chancellor already declared that buying an annuity isn’t a requirement anymore, as savers can just tap their pension funds directly. Unrestricted access to retirement savings is definitely a good thing, as it allows people to make different decisions based on their unique situations. From every angle, this is definitely a good thing. However, there are some industry concerns that unrestricted access may mean that people spend through their pension too quickly, leaving them with diminished options compared to earlier periods of their lives.
Be sure that you’re still writing a proper will that designates where this money is supposed to go. Otherwise, it’s a good time to start looking at your pension pots and determine how you’re going to move your funds!