Up to now, if you died before age 75 without taking any of your pension, you could pay (via a trust) the pension to nominated beneficiaries free of inheritance tax. However, just by taking a 25% tax-free lump sum exposed the remaining 75% to a 55% tax charge if you died before age 75. This could only be avoided if you had a spouse or dependent children under the age of 23 who could use the fund to draw an income for life (paying tax on the income in the normal way).
From April 2015, the 55% tax charge will disappear even if you've already started to draw a pension. For those under age 75 at death, the whole fund can be taken as a lump sum by the beneficiaries without incurring any tax. If you die after age 75, your beneficiaries can inherit the pension and will only pay income tax as and when they draw money. If they have any unused personal tax allowances, then they could in theory draw a tax-free income. If you die before April 2015, the pension fund can remain untouched until April 2015 in order to benefit from the change.
If you have a very large pension fund, the rule change is of significant benefit and it makes sense for you to review your will and financial planning immediately. Most pensions are written under trust and so aren't bound by will. It is therefore imperative to tell your pension trustees who your beneficiaries should be.
People who've bought an annuity probably won''t benefit as most annuities stop at death with all capital lost. Any lump sums or pensions due to a spouse on death are unaffected.
So, what comes next?
Between now and April, the detail has to be worked out in order to ensure the change is implemented smoothly and without any unpleasant side effects. Another consideration is the impact on other financial products. Pensions will become more attractive as long-term savings vehicles. Bearing in mind that ISA tax advantages are lost on death, the Government may wish to equalise the two by revisiting the current ISA rules.