Julia HutchisonBy Julie Hutchison of Standard Life.

Last year, I wrote for The Wealth Scene (see related article below) about the Budget changes to pensions, which radically alter the retirement landscape from 6th April 2015.

Since that Budget, more announcements have taken the changes even further, with new tax rules soon to improve how ISAs and pensions can be passed on.  This in turn creates an additional incentive to save, in the knowledge these assets can benefit your loved ones.

So, what’s changing and how might it impact you?

Your ISA legacy

There’s still time to use this year’s ISA allowance of £15,000. As a result of changes already made in 2014, this can be used for stocks and shares, for cash, or a combination of the two.  From 6th April 2015, this figure increases to £15,240, but until now, the income and capital gains tax benefits of an ISA ‘died with you’.

That’s about to change.  A new inheritable ISA allowance is expected for 6th April 2015 which married couples and civil partners will be able to take advantage of.

When a person dies, the value of their ISAs at the date of their death will become an inheritable ‘enhanced’ ISA allowance for the surviving spouse or civil partner.

The final mechanics of how this transferable allowance will operate are being finalised as the new tax year approaches.  It’s another example of marriage and civil partnership being recognised in the tax system.

Inherited pension wealth

It’s not just ISAs which are about to become more attractive to inherit. In September last year, pensions got a further boost with news that the 55% pension death tax is being scrapped from 6th April 2015.  This is very welcome news for pension savers with the kind of pension known as a ‘defined contribution’ pension – one where you save into your own pot.

The new tax framework for passing on this type of pension will simply involve age criteria.

If someone dies before the age of 75, pension savings can be passed on tax free. This applies whether the pension savings are taken by the beneficiaries as a lump sum or drawn down gradually.

If someone dies on or after the age of 75, the tax due on the inherited pension depends on the income tax status of the beneficiary.  This could be 0%/20%/40% or 45%, depending on the beneficiary and their other income in the year(s) they take withdrawals.  This reinforces the need for expert help to avoid sleepwalking into an unnecessary tax bill – if taken as a lump sum, a 45% tax rate could apply, whereas gradual withdrawals could involve zero or 20% tax, for example.

Pensions look set to become a family savings plan, capable of being cascaded down the generations, as unspent pension savings can be passed on again and again, until fully spent.  It will be important to ensure you have signed an Expression of Wish form, to indicate your preferred beneficiary for your pension savings – your Will is usually irrelevant in terms of how pension wealth is passed on.

Julie is a regular blogger at moneyplusblog.

A pension and an ISA holding stocks and shares are investments.  Their value can go up or down and may be worth less than you paid in.

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