John Greenwood Greenwood
How much tax relief do you really get by saving through a pension? The answer you get tends to depend on why the question is being asked.
When it comes to the increasingly anachronistic taxation of pension funds on death in alternatively secured pension, HMRC says as much as 70 per cent of fund value is down to tax relief.
With tax relief on the way in but income tax on the way out, we often hear the argument the only guaranteed advantage of pensions is the tax-free cash and the less tangible gross roll-up.
To discourage those with big pensions from going over the lifetime limit, HMRC charges tax at 55 per cent. But when encouraging us not to buy an annuity beyond the age of 75, we get a different figure. HMRC argues funds on death should be taxed on the basis that as much as 70 per cent of a saver’s pension pot could have been created as a result of tax relief. Add 40 per cent IHT on the remaining 30 per cent and you get the infamous 82 per cent figure.
The industry has been campaigning for years on the basis that 55 per cent is a more accurate reflection of the benefit of saving in a pension. HMRC says the industry’s numbers are wrong. Given that changes to the Asp rules as they stand are at the top of the wish list of pretty much all the pension professionals I talk to, perhaps some independent research should be carried out to find out which figure is correct.
The age 75 rule is already under considerable pressure, and in contrast to Labour, the Conservative Party is open to the idea of removing it, as was in its 2005 election manifesto.
While the state retirement age is rising to 68, the age pensioners are being coerced into buying an annuity is stuck a mere seven years later, at a level fixed half a century ago when life expectancy was more than a decade lower than it is today. The reality is that many of us will be working well into our seventies, and then expect to live off our pension pots for another two or three decades.
AJ Bell believes there are even more compelling reasons why the Treasury should be interested in taking the pain out of reaching age 75. A Freedom of Information request by the Sipp provider has revealed that less than 3,000 people have gone into ASP since its introduction in April 2007. What’s more, the average fund size of those doing so is around £100,000.
AJ Bell reckons that these figures show that bigger funds are avoiding the UK tax system altogether by going offshore to Qrops arrangements. It would know – like other Sipp providers it has to report to the Revenue what cases are transferred to Qrops. AJ Bell is keen to show the Revenue that this is a situation where both parties’ interests are aligned. If the Sipp clients with big funds are moving offshore then providers in the UK are losing business, but also the Revenue will be losing revenue.
When more figures as to how much Sipp money is moving offshore are available it may be possible to make a compelling financial case for arguing for a relaxation of the 82 per cent tax take on death, which AJ Bell points out seems arbitrary next to rates of 0 and 35 per cent on death before 75.
But how much a reduction in the tax take on death in Asp would change behaviour is open to question. Everybody knows the Chancellor is going to be making some unpopular decis-ions after the election, whoever wins, and getting your money out of the country is always going to have an appeal.
John Greenwood is editor of Corporate Adviser