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Govt extends pension ‘death tax’ reforms to value protected annuities

Proposals to cut the 55 per cent “death tax” on inherited pensions will be extended to value protected annuities but not standard annuities or scheme pensions, the Treasury has confirmed.

Chancellor George Osborne used his Conservative party conference speech yesterday to announce the 55 per cent penalty, which applies when someone wants to pass on their DC pot after they die, will be removed.

The Treasury initially said the new system would only apply where the funds are paid out in lump sums or taken through the new flexi-access drawdown regime, and not to annuities or scheme pensions.

However, officials have now confirmed value protected annuities – where an individual chooses to pay a premium to protect the value of the insurance contract should they die earlier than expected – will benefit from the changes. Currently, any value protected lump sum is taxed at 55 per cent.

MGM Advantage currently offers value protected annuities and says around 4 per cent of its existing book of business is written in this way.

MGM Advantage pensions technical director Andrew Tully says: “I think we could see value protected annuities make something of a comeback in the market. In the past it has not been very widely used as far as annuity death benefits are concerned, but it is unclear exactly how much it will change behaviour.”

Tully also suggests the decision not to extend the reforms to annuities means the tax system now explicitly favours drawdown.

He says: “There is a differential on a spouses benefit. So in drawdown, if you pass the fund on to a spouse they have effectively got the flexibility to draw it out as and when they want.

“Where death occurs before 75 that is more attractive than an annuity, because an annuity is always taxed at marginal rate. So for people who die before 75 you could argue that drawdown has an advantage, although most people will live beyond 75.

“It is a little bit strange [to favour drawdown over annuities in the tax system]. You would not normally expect tax regimes to favour one product type over another, but that seems to be where we are. Somebody in the Treasury has made that call.”

LV= Retirement Solutions managing director John Perks says the majority of the insurer’s fixed-term annuities are sold with value protection because the cost is minimal. But he doesn’t think the extension of the death tax changes will boost sales of the products.

“This announcement will help people realise that annuities aren’t worse than they seemed last week, but that shouldn’t affect your buying decision – drawdown and annuities are fundamentally different products.

”The Government is trying to bring to life more flexibilities and drawdown is more flexible, so it follows that they will benefit more.”

The new tax rules will apply to all payments made after April 2015, although the Chancellor caused confusion by saying the changes were “effective from today”.

The Treasury subsequently confirmed the tax cut will apply to payments made after April 2015 and that Osborne meant that people could “benefit immediately” because they could defer taking their pension until April.


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