Simplification is the key - Centre for Policy Studies
Simplification is the key - Centre for Policy Studies
Simplification is the key - Centre for Policy Studies
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Figure 5: Settling an estate after death 57<br />
Death be<strong>for</strong>e<br />
retirement<br />
• The whole fund can be paid as a lump sum. Any excess over <strong>the</strong> SLA* will be subject to <strong>the</strong> Lifetime Allowance Charge of 55%<br />
• Any part of <strong>the</strong> fund can be used to provide a taxable dependant’s pension (if <strong>the</strong> excess over <strong>the</strong> SLA <strong>is</strong> used in th<strong>is</strong> way it <strong>is</strong><br />
not subject to <strong>the</strong> Lifetime Allowance Charge) * Standard Lifetime Allowance £1.8m from April 2010 to 2016.<br />
Form of income<br />
in retirement<br />
Alternatively Secured Pension<br />
Unsecured income<br />
Lifetime annuity<br />
Death<br />
after<br />
retirement<br />
No lump sum. If any<br />
dependants, fund must<br />
be used <strong>for</strong> taxable<br />
dependant’s pensions.<br />
Any dependants?<br />
Yes<br />
Yes<br />
Member<br />
aged 75<br />
or over on<br />
death?<br />
No<br />
Lump Sum: Whole fund can be paid as<br />
lump sum, less 35% tax<br />
Dependant’s Pension: Can use any part<br />
of fund <strong>for</strong> taxable dependant’s pension.<br />
Once an income has been taken it cannot be<br />
converted to a lump sum at a later date.<br />
Lump Sum if Annuity<br />
Protection chosen: Purchase<br />
price of annuity less income<br />
payments received, taxed at 35%<br />
Dependant’s Pension: If<br />
dependant’s pension or Guarantee<br />
period selected at outset.<br />
No<br />
Dependant’s<br />
pension<br />
Yes<br />
Dependant aged 75 or over?<br />
No<br />
Purchase a dependant’s annuity?<br />
Yes<br />
No<br />
Continue with unsecured income.<br />
Amounts based on dependant’s age.<br />
Dependant dies<br />
be<strong>for</strong>e age 75.<br />
Yes<br />
Lump Sum: Remaining Fund can be paid as<br />
lump sum, taxed at 35%<br />
Dependant’s Annuity: Can use any part of fund<br />
No<br />
No<br />
<strong>for</strong> taxable dependant’s pension.<br />
Yes<br />
Any remaining<br />
Once an income has been taken it cannot be<br />
Purchase a dependant’s annuity?<br />
dependants?<br />
converted to a lump sum at a later date.<br />
Yes<br />
Result<br />
Residual Fund<br />
Donate to charity (no tax) OR transfer lump sum<br />
death benefit, subject to pension tax charge of 70%.<br />
Remaining 30% to estate, potentially subject to IHT<br />
No<br />
Fund used to buy an annuity<br />
The tax treatment of an ASP can be particularly tough. Many of those who elect <strong>for</strong> an<br />
ASP will previously have had an unsecured income, in which case, depending upon<br />
whe<strong>the</strong>r <strong>the</strong>y die be<strong>for</strong>e or after reaching 75, <strong>the</strong>ir tax treatment <strong>is</strong> very different. If <strong>the</strong><br />
<strong>for</strong>mer, <strong>the</strong>ir estate suffers a 35% tax charge (and had <strong>the</strong>y had uncrystall<strong>is</strong>ed pension<br />
funds, <strong>the</strong>n usually <strong>the</strong> full fund <strong>is</strong> payable as a lump sum with no tax due, including<br />
Inheritance Tax). However, if <strong>the</strong>y die after reaching 75 without a spouse, 58 <strong>the</strong> tax rate on<br />
residual ASP funds can be as high as 82%, 59 <strong>the</strong> consequence of a cat’s cradle of<br />
prov<strong>is</strong>ions crammed into <strong>the</strong> Finance Act 2007 60 and <strong>the</strong> Inheritance Tax Act 1984.<br />
2.6 The “cliff edge” at age 75: more uncertainty<br />
As we have seen, <strong>the</strong> age of 75 marks a watershed <strong>for</strong> pensioners, requiring a dec<strong>is</strong>ion in<br />
respect of compulsory annuit<strong>is</strong>ation or an ASP. It also exposes <strong>the</strong> saver to timing r<strong>is</strong>k<br />
and creates uncertainty in respect of <strong>the</strong> taxation of unused pension savings.<br />
Consequently, <strong>the</strong> age of 75 <strong>is</strong> an arbitrary, d<strong>is</strong>criminatory and penal “cliff edge” which<br />
runs contrary to what <strong>the</strong> Government should be doing: actively encouraging pension<br />
57<br />
58<br />
59<br />
With thanks to St. James’s Place Wealth Management Group.<br />
If <strong>the</strong> estate exceeds <strong>the</strong> nil-rate band <strong>for</strong> inheritance tax (IHT) of £325,000 (2009-10), doubled <strong>for</strong><br />
couples (care of <strong>the</strong> automatic transfer of spouses’ allowances).<br />
See <strong>the</strong> Glossary <strong>for</strong> detail (under Alternatively Secured Pension).<br />
60 Paragraph 69 and Schedule 19.<br />
18