Pru warns 55% tax on death benefits will hit low earners

Prudential has warned the Government to carefully consider its proposal to increase the tax on death benefits from 35 per cent to 55 per cent, adding that it may hit basic rate taxpayers particularly hard.

Treasury financial secretary Mark Hoban today announced proposals to scrap compulsory annuitisation and replace ASP with capped and flexible drawdown regimes for people who do not want to buy an annuity.

The Treasury says any unused funds remaining upon death will be taxed at 55 per cent if the individual is over 75. Death benefits for those who die before age 75 without having accessed their pension savings will remain tax-free.

Prudential UK deputy chief executive Barry O’Dwyer says: “On the proposal to increase the tax on death benefits to 55 per cent, we believe the Government needs to consider this carefully because it runs the risk of hitting basic rate taxpayers particularly hard because an increase to 55 per cent will far exceed the tax relief they will have gained while they built up their pension pot.”

O’Dwyer has welcomed the Government’s proposal to scrap ASP, in favour of capped and flexible drawdown regimes.

He says: “ASP has failed to make an impact and in reality had become one more thing for customers to discount when planning for their retirement.  Today’s proposal removes that confusion and simplifies matters considerably.

“The Government’s proposal to abolish ASPs should make the landscape a little clearer for people in retirement by simplifying the options to either buying an annuity or moving into a USP arrangement.”

Aegon says removing compulsory annuitisation at age 75 by April 2011 is likely to mean people will need more advice to help them make the right decisions about securing their retirement income.

It is also calling on the Government to overhaul the retirement tax rules to reflect increases in longevity.

Pensions development manager Kate Smith says: “We must take this opportunity to have a complete overhaul of retirement rules and consider how they tie up with long-term care provision.

“We need to look at what will encourage people to start and keep on saving in a pension and how we can give them the flexibility and security in income they need as they move through the different stage of retirement.”