Currently where an individual pension holder dies before age 75, drawdown pensions or short-term annuities paid to a dependent, nominee or successor can generally be paid free from income tax (see EIM75660).
Policy documents published on Legislation Day 2023 on 18 July, include draft legislation to abolish the lifetime allowance and associated income tax charge. These were previously announced as part of Budget Day measures to lure workers aged over 50 back into work.
However, among other measures, the policy paper also indicates that the taxation following some benefit crystallisation events (BCEs) is to be reformed. BCEs are the points at which the pension administrator previously needed to test the value of the pension against the lifetime allowance.
According to the documents, the rules for BCE5C and BCE5D may be amended. These BCEs apply when a pension scheme member dies before reaching age 75, and the uncrystallised pension fund is used to provide a drawdown pension or annuity for a surviving beneficiary of the pension. The document sets out that while beneficiaries will still be able to access benefits under BCE5C and BDE5D, their, “values will no longer be excluded from marginal rate income tax under ITEPA, with effect from 6 April 2024”.
This means that surviving beneficiaries receiving income from a drawdown pension or annuity would pay income tax at their marginal rate of tax on funds received. This is currently the position for beneficiaries of pensions where the member dies over age 75.
While this would align the position between members who die before 75 with those that die after 75, it will also have an impact on pension planning where this is a factor. Such a policy change, if that is the intention, has not previously been announced by the government.
ICAEW’s Tax Faculty has asked HMRC for clarification of the proposed policy position.
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