The Changes to a Spouse’s NISAs Death Benefit

As of April this year, an announcement that formed one of the core focus points of Chancellor George Osborne’s Autumn Statement in 2014 came into effect. For the first time ever, tax-free returns were to be paid out to spouses following the death of a partner and the inheritance of their ISA pots. At the time of the announcement, the Chancellor said that in the region of 150,000 married individuals with ISAs die in the United Kingdom every year, which at the time resulted in a situation where the benefits and advantages tax-wise of holding an ISA in the first place died with the individual. Now though, when the ISA pot is passed onto their surviving spouse, so too are their tax advantages and benefits.

The change was rolled out alongside another important reform whereby if and when a married partner passes away before reaching the age of 75, the surviving partner will be entitled to access the deceased party’s annuity retirement income free of taxation. Or in other words, the idea was penned and implemented as a means by which to offer more tax free income to those whose partners die early. Annuities are specific income set at an annual rate for the rest of the individual’s life – when this kind of financial product was passed onto a spouse prior to April this year, the income paid out to the surviving spouse was subject to income taxation.

Before the reform, those with defined-contribution pensions were in most instances forced to use their retirement pots to purchase annuities. As of now, they will also have the option to keep their pensions invested as they are and take income at their own preferred rate/level. And when those who choose to keep their pensions invested die before the age of 75, the remaining pots can be passed on to their spouse free of tax.

By contrast, any pension and that is passed on to a spouse when the individual in question dies over the age of 75 will be subject to income taxation at the standard rate.

In terms of getting the very most out of any accrued savings put away in an ISA, the change in the government’s approach to benefits and taxation now means that when one partner dies, the surviving spouse can add the deceased’s savings onto their own without having to pay tax on them. If for example savings of £60,000 were to be inherited, the surviving spouse would amount savings in the region of almost £500 a year.

In a recent report published by the Treasury, research suggests that approximately 140,000 to 170,000 people per year on average will benefit from the new approach to ISA taxation. But while the changes apply to married couples and civil partnerships alike, the relaxed taxation system doesn’t apply to common-law partnerships.

Many of the changes rolled out as of April this year were rather complex in nature and of particular importance to those approaching retirement age. As such, it is highly recommended that those with questions, queries or concerns outstanding with regard to their own retirement and pension schemes seek professional, independent financial advice at the earliest juncture.