The government has confirmed that it will review the tax charge on pension funds held in a drawdown product at death or uncrystallised after age 75, stating the current rate of 55 per cent may be too high when the new freedoms come into force in April 2015.
The Treasury will continue to consider the options for altering the rate and will confirm its intention as part of the Autumn Statement.
Its final rules on pension freedoms, published yesterday (21 July), state: “Discussions with a wide range of stakeholders on this issue have confirmed the view that the 55 per cent charge is too high, and needs to be changed.
“However, this is a complex area and any changes have the potential for unforeseen and unintended consequences.”
Dave Roberts, senior consultant at Towers Watson said: “The government is continuing to mull over whether, or more likely how far, to cut the 55 per cent tax that applies to income drawdown pension pots when the pension saver dies.
“Without this, terminally ill pensioners who have already accessed tax-free cash may feel they need to rush to withdraw the remaining balance from their pension so that it is only taxed at their marginal rate and not more punitively.”
Andrew Tully, pensions technical director at MGM Advantage, said: “Care needs to be taken as this won't change until April 2015, so a tax charge of 55 per cent remains for any deaths before then where benefits have been taken.”
“Taking benefits in phases remains a tax efficient approach so speaking to a professional financial adviser will help people understand the most suitable approach for their circumstances.”
Standard Life previously called for the flat rate tax on so-called 'death benefits' to be moved in line with inheritance tax to make them fairer. The 55 per cent tax charge applies in two situations where a lump sum is paid out, most commonly with a self invested personal pension, according to Standard Life.
Where a person dies, aged over 75, the 55 per cent tax charge applies to the whole fund, regardless of whether the customer had taken any withdrawals from their pension yet or not.
Where a person dies before the age of 75 and had started to take withdrawals, it applies to the part of the pension which has been touched, known as 'the crystallised fund'.