Most of the feared pension changes – such as any reduction in tax free cash or flat rate tax relief – didn’t appear in the Budget, which is good news. However, we did see a change in the taxation of death benefits and a small closure of a loophole for overseas transfers, which is worth taking note.
IHT and pensions
The Government has referenced the changes in 2015 as a reason to bringing forward the proposals for technical consultation on pensions and IHT. These changes plan to bring unused death benefits into the estate of the deceased. This covers most death benefits but excludes income paid via a benefits scheme pension, which would be those paid under a defined benefit pension scheme generally.
They also exclude benefits paid from a life policy purchased with pension funds, such as an annuity bought in the lifetime of the member as well as charity lump sum death benefits.
Previously, if pension death benefits were paid under the discretion of the trustees/administrators they would have been generally exempt, but this distinction is now being removed. This may well mean that more people decide to consider a binding nomination on death removing an option of a challenge. The spousal exemption on inheritance will be applicable to pension death benefits in the same way as other assets in the estate.
Although the reporting and calculations will be made by the personal representative, the payment of IHT will be apportioned to the scheme and paid before the funds are released or allocated to the beneficiary for use. This is to ensure that for those who die over the age of 75, there isn’t income tax charged on the amount needed to pay IHT.
Overseas transfers
Transfers to Qualifying Overseas Pension Schemes where the individual remained in the UK and their funds were transferred to the EEA or Gibraltar were previously exempt from the 25% Overseas transfer charge on the whole transfer – unlike if you transferred to another country and didn’t go with your pension fund.
This has meant that you could transfer overseas up to the value of your Overseas transfer allowance (generally £1,073,100) without charge and once the funds were out of the country, you could access the equivalent of their tax-free cash option. As using your Overseas Transfer Allowance didn’t restrict your Lump Sum Allowance, you would retain access to your full entitlement of tax-free cash in the UK.
This was seen as unfair and caused by poorly drafted changes in the abolition of the Lifetime Allowance. This loophole will now be removed, which will bring everyone back in line with the intent of legislation, alongside some more technical changes in this area. This comes into force tonight, so there is no scope for a sudden rush to make overseas transfers and use this loophole.
NLW and AE
The government’s increase in the National Living Wage to £12.21 an hour (£22,222 pa) will drive a rise in auto-enrolment contributions for those impacted, and will reduce the increase in pay in their pocket to some extent, as individuals will not only have to pay tax and national insurance on the increase but also £70 of pension contributions a year (35 hours a week worker).
Having said that, they will benefit from an additional £42 a year from their employer in contributions. Additionally, someone working only 16 hours a week on National Living Wage will now be pulled into auto-enrolment because their earnings will be just over the trigger threshold of £10,000 pa.
This would mean a personal contribution of £195.90 pa, nearly a third of their annual increase before tax and National insurance. They would, of course, benefit from £117.54 of employer contributions.
It should be noted, however, that many employers offer more generous pension schemes, and these figures would therefore be different.
Claire Trott, divisional director retirement & holistic planning at St James’s Place
Comments