Financial firms are warning that new flexible access pensions may cost retirement savers thousands of pounds in tax if they fail to nominate who should receive any unspent funds when they die.
Under the new Taxation of Pensions Bill outlining the rules for the new pension regime starting on April 6, 2015, one clause radically changes how unspent pension funds are handled by providers.
Under current pension rules, providers have some discretion about who gets the unspent cash in a pension if the pension saver has not nominated a beneficiary.
However, several financial firms are warning that the new draft laws remove this discretion and demand that they pay the pension to the pension saver’s nearest relative – starting with the spouse or children under 23 years old.
This could cause a real tax problem for families.
John Greer, of Mutual Wealth, explains that now the 55% death charge on unspent pensions is abolished, someone aged 73 could pass their unspent pension on to any beneficiary free of tax.
The problem comes if that beneficiary is the spouse and she does not need the cash, because when she dies and someone else inherits, they pay tax on the money at their marginal rate.
It’s obvious that if the money bypassed the wife and the pension beneficiary was the pension saver’s child that no tax would be due.
To avoid this issue, the pension saver must nominate the beneficiary to the pension provider.
“The new rules will not leave pension firms with any discretion about how to distribute the money,” said Greer. “We will have to follow the law, even if that means a possible future avoidable tax bill for a beneficiary.”
Reporting limit U-turn
Meanwhile, the government has had a rethink after protests about time limits for reporting pension drawdowns.
The Taxation of Pensions Bill suggested pension savers with more than one pension would have just 31 days to inform other providers that they had drawn cash from another scheme.
Chancellor George Osborne has amended the proposed rules so pension savers only have to report drawdowns to providers accepting pension contributions from them.
They now have 91 days to make the report instead of the original 31 days.
Fines still remain at £300 for missing the deadline and £60 a day thereafter.
False reports could also attract a £3,000 fine.