What pension reform means for you

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Pension reform has made many of us feel differently about our pensions

A few years ago, we only wrote bad news about pensions. These days we only seem to write good news. There was more this week .

Chancellor George Osborne announced that from April 2015defined-contribution pensions are going to get even better tax treatment than they do already.

Back in the days when final-salary pensions were standard and annuities an accepted part of retirement, it was entirely accepted that pensions died with their holder. They weren’t inheritable assets.

That’s changed. The death of the final-salary pension and rise of the personal pension, along with new pension reform, have made many of us feel differently about pensions: we’ve built them up; they’re ours; and we want to pass them down without leaving a tax bill. Osborne gets this. So, he says, from April, rates on pension inheritance will change.

The chart below shows the details, but the key point is that if you die before 75, your heirs get your pension entirely tax-free – as a lump sum or to draw down on as they please. So if you have £500,000 in your pension on your death aged 74, it’s all theirs.

This seems oddly generous, given the role the taxpayer will have had in helping build up the savings in the first place, but there it is. If you die after 75 there will be more to pay – a 45% charge on a lump sum (although this is likely to be adjusted tothe marginal income tax rate of your heir), or ordinary income tax on anything drawn down from the fund.

If you have a personal pension and assets likely to be over the inheritance tax (IHT) threshold, this is the kind of move that should make you think about putting as much as possible into it (subject to the Life Time Allowance of £1.25m).

If you die after 75 and your heirs are in the 45% tax bracket there may not be gains from the new rules, but few people stay in that income league for long – most heirs are likely to pay less tax on a pension than on assets subject to normal IHT.

Finally a word on final-salary pension schemes (which, spousal benefits apart, still die with you) and these new rules.

It is rarely worth switching out of a scheme that offers you an inflation-linked income for life. But the idea you could swap it for a lump sum you could then leave to your children might be tempting enough to make you find out the transfer value of your pension.

If you die before age 75
Old rules New rules
Lump sum Tax free or 55% tax if in drawdown Tax free
Income Taxed as income (via an annuity or drawdown)Option available only to dependants Tax free if taken via drawdownTaxed as income if taken via an annuityOption available to any beneficiary
If you die after age 75
Old rules New rules
Lump sum Subject to 55% tax Subject to 45% tax (unless paid as income)
Income Taxed as incomeOption available only to dependants Taxed as incomeOption available to any beneficiary