One reason for getting rid of the 82 per cent death tax on funds in alternatively secured pensions is to stop that shockingly high number being used to justify expensive and questionable financial planning solutions.
A tax rate as high as 82 per cent was always going to cause problems. It may not be quite as high as the 95 per cent rate made famous by George Harrison in the song Taxman, but it is not far off. A figure of 82 per cent is certainly big enough to make it easier for advisers to persuade clients that complex tax-saving structures are in their best interests.
There are several areas where the effect of the infamous 82 per cent tax rate has been to create complexity but surely the most controversial are in the fields of accelerated pension withdrawal and transfers to qualified registered overseas pension schemes.
Transfers to Qrops have soared since the 82 per cent charge was introduced in 2007. AJ Bell says hundreds of millions of pounds have now been moved offshore and believes the increase is directly linked with people looking to avoid the tax charge. Most IFAs I talk to confirm the view that a large proportion of those wanting to offshore their pension are not people with a genuine desire to emigrate.
Pension advisers are pretty clear that Qrops are only worth doing if you are genuinely retiring abroad or there is an international dimension to your affairs. If someone is promising to bust open your pension, you are asking for trouble.
When it comes to accelerated pension withdrawal, the debate is a lot more emotional. Putting that emotion to one side, the fact is it is not against the law to make an unauthorised payment of 24.9 per cent of fund value, provided a 55 per cent tax charge is levied. Unauthorised does not mean illegal. Talbot & Muir, which I believe is the only Sipp specialist to actively market accelerated pension withdrawal, comforts its clients with a letter it has from its tax office confirming it is not breaking HMRC rules, provided it collects the 55 per cent tax.
As with transfers to Qrops, each case must be based on its merits and if somebody is so well off they will never need the money from a pension and is soon to be paying tax at 50 per cent and is likely to die in the not too distant future, then there may be a case for taking the 55 per cent hit by going for accelerated pension withdrawal.
But and this is where the FSA waded into the debate before Christmas if it is not in the client’s interests to take such a big hit, then regulatory action against the adviser could follow. I would expect the FSA will want to see that the various other solutions for dealing with the 82 per cent tax hit have been exhausted before opting for a solution which involves a 55 per cent tax hit and charges just shy of £1,000 a go.
Maximum drawdown to 75 and a 10-year guarantee will all but empty most pots while use of a scheme pension through a family Sipp can achieve effective estate planning outcomes without a 55 per cent hit.
What’s more, it is one thing to say people should be allowed to make their own decisions about what they do with their money. But if clients are paying high levels of tax and charges to get their hands on their pension because they are desperate for the cash, the regulator will rightly be asking what they are expected to live off when they retire.
The 82 per cent figure is an emotive one, which is one reason why the Conservatives are pledging to address it if, as expected, they take power later this year. No one likes the idea of waiting for politicians to do anything but individuals planning to spend money on elaborate financial planning structures to avoid the perceived problem should hold on and see if it evaporates.
John Greenwood is editor of Corporate Adviser