GEORGE Osborne’s announcement, during the Conservative party conference, to increase the flexibility of defined contribution pension schemes even further than his announcement in the budget, puts the whole area of pension scheme planning once again back in the melting pot.

Broadly, the aim of the changes is to effectively get rid of the 55 per cent pension scheme charge on pensions pots transferred on death altogether. Primarily the changes impact on defined contribution schemes but can also apply to defined benefit lump sums as well.

Currently, the 55 per cent tax rate applies where an individual dies and a lump sum is paid out of their pension to a beneficiary and where pension money is crystallised (regardless of an individual’s age at death), or uncrystallised and the individual is 75 or over at death. Currently an individual can pass their defined contribution pension to their dependent (spouse, civil partner, child under 23 or other financial dependent), who can draw it down at their marginal rate of tax.

Where the individual died under the age of 75 and there were uncrystallised pension funds, it can be paid out as a lump sum completely tax free (up to the lifetime allowance).

Under the new system the 55 per cent tax rate will no longer exist. Anyone who dies below age 75 who hasn’t yet started their pension, or is taking a drawdown pension, will be able to give their remaining defined contribution pension as a lump sum death benefit or as flexi-access drawdown completely tax free. This does not apply not apply to income from annuities or scheme pensions. Income from these sources will be taxed at the beneficiary’s marginal income tax rate.

Those over 75 who haven’t yet started their pension, or are taking a drawdown pension will be able to pass on their remaining defined contribution pension to any beneficiary who will be able to take it as a draw down pension at their marginal rate of income tax, or as a lump sum taxed at 45% (reduced to the marginal income tax rate from 2016/17).

The reforms will apply to payments made after April 6, 2015, rather than death on or after April 6, 2015. This therefore offers some scope for deferring payments from the scheme administrators until after 6 April 2015.

Where an individual dies under 75 with a defined benefit scheme and hasn’t taken their lump sum then the beneficiaries may be able to take the lump sum tax free, subject to the member’s lifetime allowances.

Should you need any further advice, please call 01904 717260.