Changes will act as an incentive for people to moderate spending in early retirement
“The removal of the draconic death tax is good news for most pension savers, and coupled with the new retirement flexibilities, will make income drawdown even more attractive when compared to annuities.
“People need to know exactly what will happen to their pension fund on death, and now we have the missing piece of the jigsaw. If a pension saver dies before age 75, even if they have started to take some payments, they will be able to able to pass on their remaining pension funds tax free to their children and grandchildren. And on death after age 75, beneficiaries will pay income tax at their marginal rate, only once they start taking the money.
“Drawdown, rather than annuities benefits from these changes. If customers take out an income drawdown product they can decide who will benefit in the event of their death, unlike annuities where the amount is absorbed into the insurance company’s annuity pool for the benefit of other annuitants.
“For those people whose loved ones were in drawdown and who die before April 2015, the beneficiaries may wish to delay taking any payments as depending on the deceased person’s age, these may be tax free if they hold off until these changes come into place.
“People are far less likely to empty their pension pot in the early stages of retirement purely to avoid the death tax now. There has been some concern that new pension flexibilities could encourage people to spend much of their pension in the early stages of retirement but this announcement incentivisesthem to make their pension income last longer. As a result it is more likely savers will ring fence some of their pension for later life, and this money could be used to fund long term care if required, with the added bonus of being able to leave significantly more of remaining funds on their death to their loved ones.
“Income drawdown isn’t simple and people should use professional advisers to help them manage their pension monies into later life. No-one knows how long they are going to live, but the new retirement tax regime is likely to drive better long-term planning."
Kate Smith, Regulatory Strategy Manager at Aegon
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