The Treasury is set to lose £50m in 2015/16 and £730m by 2019/20 as result of changes to the pensions “death tax”, Government documents reveal.
But an expected increase in transfers from defined benefit to defined contribution schemes will see Treasury coffers grow by £95m next year and a total of £1.15bn in five years’ time, the Government estimates.
The reduced annual allowance and changes to the rules on small pension pots will initially boost the Government’s tax take by £15m, but by 2019/20 this will have turned into a £120m loss, the Government says.
Transfers from DB to DC schemes are expected to grow as the Budget reforms increase the appeal of DC schemes as a way of accessing pensions from April 2015.
Towers Watson senior consultant David Robbins says the prediction is based on the expectation of members moving from funded public sector schemes to DC schemes.
Transfer out of unfunded public sector schemes – such as the NHS and Teachers’ funds – are currently not allowed.
He says: “They are saying people in funded DB schemes as they near retirement will say I’m going to transfer to DC schemes and spend the money quicker, it’s bringing tax revenue forward. Some of it might be the increase in how much you pay over your lifetime, for example you may pay higher marginal rates of income tax by taking more from your pension pot earlier than you would otherwise.”
The Chancellor also confirmed in his Autumn Statement that widowers and beneficiaries who inherit unspent pension savings – whether as annuities or through drawdown arrangements – will have no tax to pay if the member died before the age of 75. However, this has not been extended to scheme pensions.
Fidelity Worldwide Investment retirement director Alan Higham warns the tax advantages of passing on unspent pensions through DC schemes may lead to “death bed transfers”.
He says members who know they may die before reaching 75 could decide to transfer out of defined benefit schemes so their beneficiaries receive their pension tax-free. In a DB scheme, inherited pension income is taxed as income.
Higham says trustees may be forced to collect medical information before approving transfers as paying out transfer values for members who die soon after could leave them out of pocket.
He says: “You pay the transfer value out assuming people live to the average life expectancy. If they turn out to be seriously ill you’re vastly overpaying them, leaving less money to pay everyone else. Actuaries will have to be very careful. How do you guard against all the sick people leaving? Schemes may need to introduce a way of gathering medical information.”