Chancellor George Osborne has unveiled plans to scrap the 55% tax on pension funds when somebody dies from April next year.
It means people with defined contribution pension savings will no longer have to consider the tax and will have the freedom to pass it on to any nominated beneficiary upon death.
Around 320,000 people retire each year with defined contribution pension savings, and individuals will be free to nominate a beneficiary from April 2015 if they have a drawdown arrangement or uncrystallised pension fund.
New rulings from April 2015
Under the new rulings, if an individual dies before the age of 75, they will be able to give their defined contribution pension to anyone as a lump sum, completely tax-free.
However, this will only be possible as long as it is in a drawdown account or is uncrystallised – the person taking from that pension will then pay no tax, regardless of how the money is removed.
For those with a drawdown arrangement or with uncrystallised pension funds that are aged 75 or over, will also be able to name a beneficiary.
In this instance, that person will then be able to access the pension funds at any point, only paying tax at their marginal rate of income tax.
More flexibility for accessing pensions
The beneficiary in each case will not be limited to how much they can withdraw from a pension, although the option to withdraw it as one lump sum will be taxed at 45%.
This means the current system, which charges 55% tax will be scrapped and this move could potentially benefit approximately 12 million people in the UK.
The government has committed to reviewing the system as part of a Freedom and Choice in Pensions consultation and follows on from announcements made in this year’s budget.
It saw new rulings relating to how people aged 55 and over can access their pension pots, providing more flexibility for them to manage their finances.
Managing pension pots
Financial management is extremely important, so keeping spending in check with a prepaid card is a great way of ensuring that you do not spend more than you would like.
A prepaid card limits spending to the amount on the card at any given moment and is not directly linked to a bank account, making funds safer as a result.
It offers a safe location to protect pension payouts and to ensure that they are not spent irresponsibly.
The cards can easily be topped up or replaced if required, while accounts can be checked regularly online if needed.