The blistering pace of pensions reform continues, with the age 75 consultation having closed for comments a few days ago.
This consultation proposes the extension of income draw-down beyond age 75, obliterating the unloved alternatively secured pension. In essence, all drawdown becomes unsecured income or “capped draw-down” in the new parlance. The annual withdrawal limit is up for discussion but do not be surprised if it remains close to the existing 120 per cent pre-age 75 limit.
This is a welcome change and simplifies income draw-down. What is less welcome is the tax charge on death. Today, in most circumstances, it is 35 per cent where drawdown has commenced and death occurs before age 75. After age 75, the tax charge rises to 70 per cent, with IHT potentially on top, taking the total charge up to a stratospheric 82 per cent.
The consultation proposes that the tax charge on death is 55 per cent both before and after age 75 and outside the estate for inheritance tax.
The apparent generosity of the proposed charge compared with 82 per cent needs to be viewed in the light that 82 per cent is plainly ridiculous.
A charge of 55 per cent is 20 per cent more than the 35 per cent that applies in the event of younger deaths today and is supposed to represent a fair reclaim of average tax relief received. For a 20 per cent taxpayer, the rate required to reclaim tax relief, after adjusting for the tax-free lump sum, is 27 per cent. Even accounting for gross roll-up, 55 per cent penalises those who have largely received basicrate relief on contributions.
For those having received 40 per cent tax relief, the 55 per cent charge is nearer the mark. But remember also that most people receiving 40 per cent relief today will probably have received relief at the basic rate over much of the period they have saved. Overall, a tax charge of 40 per cent on death is a fair compromise.
Alongside capped draw-down, a further proposal is to allow unlimited lifetime withdrawals as long as a mini-mum income requirement is met.
This will be called flexible drawdown. The MIR remains one of the least predictable aspects of these proposals. Any withdrawals taken under this option will be added to income in the year of withdrawal and taxed accordingly.
Flexible drawdown offers many tax avoidance oppor-tunities, which HM Treasury was already aware of when the proposals were first released. The conclusion must be that if flexible drawdown does go ahead, anti-avoidance legislation will not be far behind.
There is potential to make these proposals even more attractive by allowing tax breaks for using retirement savings in a way which reduces the tax burden on others. For example, using pension funds to pay for long-term care or transferring unused funds into the pensions of the next generations.
Overall, these are welcome proposals, increasing flexi-bility for those in and approaching retirement.
John Lawson is head of pens-ions policy at Standard Life