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Paul Lewis: Osborne’s latest stealth tax grab from pensioners

Paul Lewis

The Chancellor quietly announced taking another £1.25bn from pensioners in his March Budget. He did not put it quite like that, of course. In fact, he did not mention it at all. But there it was in a line labelled “Annuities: secondary market”. He will take £485m in 2017/18, £475m in 2018/19 and then £150m and £145m in the following two years where the figure is expected to settle as an annual tax bonus.

This money is income tax. It will come from the next stage of pension freedom announced in March 2015, postponed in July 2015 and then confirmed in 2016 for implementation just before Easter 2017: selling back income for life for a lump sum. Otherwise known as creating a secondary annuity market.

The new rule will satisfy the demands of many of the six million people who had already bought an annuity with their pension fund before stage one of the freedoms was announced in March 2014. “Why not us?” they cried. “It is so unfair,’’ they complained. Well, be careful what you wish for.

The Government estimates around 300,000 of the six million will take advantage of this new freedom and warns that “for most annuity holders, continuing to hold the annuity income will be the right decision”.

For those that do sell, it has confirmed the newly liberated money would be added to income in the year it was received and taxed accordingly. That is the same as the way pension freedom lump sums are taxed, except, of course, that 25 per cent (usually) of those are tax-free.

The first part of the freedom and choice regime is already giving Osborne a nice bonus. In 2015/16, £4.35bn was liberated. But it was not spent on 16,000 Lamborghinis. The 232,000  people that cashed in 512,000 funds would have been lucky to buy a Ford Focus.

Sadly, HM Revenue and Customs tells me it “is just not possible” to work out how much tax was taken from the £4.35bn. It would need complicated sums.

But we do know that the Office for Budget Responsibility predicts the total tax take to be £900m in 2015/16, which is £200m more than it expected a year ago.

It is also a great deal more than the £320m figure booked at the time of the March 2015 Budget, which netted off the cost of extra tax relief as pensions became more attractive and more people paid more in.

Now we have the next stage of pension freedoms, which will bring in more than a billion pounds to help Osborne balance the books (well, not quite balance, but reduce the still rather stunning deficit of £74bn in 2015/6).

“Once annuitants are allowed to sell their income for life back to an insurance company in exchange for a lump sum from next April, Osborne is expected to rake in an extra half a billion pounds a year for each of the first two years”

Indeed, once the annuitants are allowed to sell their income for life back to an insurance company in exchange for a lump sum from next April, Osborne is expected to rake in an extra half a billion pounds a year for each of the first two years.

However, for some of those delighted with the freedom to cash in their income for life, it will come at a heavy price. When the lump sum is added to their income and taxed in the year it is received many non-taxpayers could end up paying 40 per cent on some of their liberated annuity.

Joyce has a state pension of £6,000 a year and a flat rate annuity of £5,000 a year, which she bought with her £91,000 pension fund five years ago.

She pays no tax as her income is below the personal allowance, which will be £11,500 from 2017.

Next April she wants to cash in her annuity and after a medical that finds her remarkably fit she is thrilled to be offered £55,000 (and that may be a generous guess).

When that is added to her income, however, she finds she has to pay £14,700 in tax: most of that at the 40 per cent rate.

Joyce has never paid higher rate tax in her life and it is some years since she paid any tax at all. She does not claim any means-tested benefits but if she did she would lose those too.

In some ways Joyce is lucky. Although the Chancellor is giving us the freedom to cash in our annuities he is not forcing any annuity provider to let us do it, nor is there any guarantee that any firm will buy it for a price we consider fair. At least Joyce sells hers.

Joyce was also healthy when she bought it and is just as healthy now. Not everyone will be in that position. People who had ill health when they bought their annuity but were missold a standard rate product will find their life expectancy is now a lot shorter than average and the value of the annuity will be far less than they paid.  Instead of the income bonus unhealthy people get buying an impaired life annuity, the cashers- in will pay an illness penalty as the income stream they are selling will be coming to an end sooner than the insurance company (and they!) would like.

Anyone who has developed a health condition since buying their healthy rate annuity will be in the same position.

Come next Easter, taxing poor widows like Joyce at 40 per cent will take a bit of the shine off Osborne’s populist Budget policy – if he is still Chancellor, of course. And we all know an annuity is for life, not just for Easter.

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on twitter @paullewismoney

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. I wouldn’t call it a stealth grab. it is a logical taxation in line with how pensions have historically been taxed. i.e. income tax on the amount paid. Indeed, any alternative method of taxation would leave it open to potential loopholes or inconsistent taxation. If you take an amount over the years, you pay income tax (above personal allowance) on that income each you are paid it. If you take it in one go, then its taxed in the year it is taken. Logical and sensible.

  2. headbelowthe parapet 5th May 2016 at 11:45 am

    One assumes this is copy from another publication? I’m sure we are all well aware of this Paul.

  3. Martin Tilley 5th May 2016 at 11:49 am

    What we have to point out is that this is a “voluntary tax” in that it is not payable unless the annuity is sold. Such a decision would require advice and part of that would include the tax consequences of doing so. Joyce as an example would appear to be prime candidate for retaining her annuity and thus the Treasury would not benefit from the tax outlined in the article.

  4. Nigel Baxendale 5th May 2016 at 11:50 am

    Surely this isn’t a stealth tax Paul. Most annuitants will have already taken their tax free element at the point of buying an annuity. Therefore, the balance is to be paid as income. If the annuitant decides to draw down all of that income in one go, it should be taxed as such. Nobody is forcing them to do so.

  5. Was it ever anything other than a tax grab?

  6. Matthew Thompson 5th May 2016 at 1:10 pm

    Don’t do it Joyce

  7. Newsflash – money withdrawn from a pension fund is taxable.

  8. ‘He will take £485m in 2017/18, £475m in 2018/19 and then £150m and £145m in the following two years’. Well if the general comments made by advisers on this site and other similar publications is anything to go by, he is going to be rather disappointed. No one seems to be remotely interested in going near this banana skin business category. It’s hard to see where it is going to be in anyone’s interest (other than Paul Lewis’ observation of the tax take) and the claims management vultures are no doubt already talking to the TV advertising agencies preparing the next series of adverts. Clearly this new category of advice needs to be separated from the ‘bog-standard’ financial adviser business – i.e. high risk, DB transfers, UCIS etc. I for one would seriously resent having to pay even more in levies to the FSCS for the predictable train crash that will be coming along anytime soon associated with this business type. Let alone what the PII companies will make of it.

    On a separate note, if IFA’s decide not to advise on the secondary Annuities market and P2P ISA’s, will they have to class themselves as Restricted?

  9. Thank heavens Chancellors are not for life. But Osborne will presumably claim that it is not his fault, Joyce should have put the proceeds in a new flexible drawdown product and staggered the withdrawals.
    But why keep repeating the government spin and referring to the new measures as ‘freedoms’? Isn’t flexibilities better? Flexible. Like rope. Which, if you give Joyce enough of …..

  10. Of course there is a favourable tax element for the treasury (pension freedoms were less certain to raise tax but still clearly tax positive for the treasury) but it also introduces consumer choice and the tax position is one which simply needs to be factored in (along with the many other factors).

    It’s not a stealth tax (and I find it frustrating when such ‘headlines’ are used as it moves from fact to emotion) …. and will it be in the investors interest – that of course depends.

  11. Why would anyone give up a £5k guaranteed return off a net of tax £40,300 investment (12.41% p/a)? What a ludicrous example in an article written to create a headline out of nothing.

  12. Colin Douglas 5th May 2016 at 3:31 pm

    Presumably there is no requirement for advice to be taken? Only an actuary/underwriter could hope to assess whether these encashments would represent anything like fair value. Osborne has shown a shocking disregard for a group of annuitants who really shouldn’t go anywhere near this but will be enticed by a derisory wad of taxable cash in return for, in many cases, a secure retirement.

  13. What Paul fails completely to mention, but I am sure is 100% aware of (having the extensive knowledge of financial services that he does), is that Joyce could of course move some if not all of the money into Drawdown and then take smaller amounts over a period therefore reducing her tax liability and not being forced (as Paul is suggesting) into having to pay so much tax.

    It is such a shame that Paul doesn’t have enough copy to be able to explain this to poor old Joyce, but rather had to concentrate on the possibility (not compulsory and highly unlikely) that she would have to pay so much tax when selling her annuity. However i would be more than confident that he will do so in later articles – he wouldn’t want to appear to be misleading now would he!

  14. All this illustrates yet again that the Patricians think (with some justification, it must be admitted) that the general public are complete numpties and treat them as such.

  15. Gosh

    Where’ve you been Paul?

    I don’t recall you opining upon the much bigger “tax grab” involved with pension freedom in the first place, but now focus on the “grab” that would arise if annuitants sell their annuities/

    I may be wrong, but I don’t see the annuity secondary market taking off at all, because the offered deals will by definition be rubbish for annuitants.

    I’ve been bashing away at the cynical nature of the acceleration of income tax revenue stream dressed up by Osborne as treating people like grown ups for ages. but not one financial journalist, MP or otherwise addressed this for what it is – just part of the plan to get the tax take from pension income now rather than later and leave someone else to balance the books and pick up the social consequence pieces.

    Ian Coley

    • I don’t know where you’ve been Ian but I did ‘opine’ as you put it on the earlier tax take. My twitter feed @paullewismoney is a good place to keep informed about what I really do say.

  16. “People who had ill health when they bought their annuity but were missold a standard rate product will find their life expectancy is now a lot shorter than average and the value of the annuity will be far less than they paid.” Missold…no, the most likely position is, too blinkered to have paid for advice and walked into taking an annuity from their current provider (even although OMO is stamped all over retirement packs now and has been for some time). You are such a cynic Mr Lewis.

  17. Emotional language chosen to stoke feelings unneccessarily.

    It’s not a stealth tax grab, it’s completely in line with the current taxation of pension provisions. Could the same be said of cashing in a collective and being caught out by CGT? The rules are the rules and part of the reasoning for recieving financial advice is because an adviser would highlight the “additional” tax liable for any chosen course of action.

  18. It is really simple. If they want to be total morons (for 99.9% of cases) and sell up, let them. Advisers steer clear, let them do whether want to do, who really cares? I don’t think there will be too many advisers out there that will have annuity clients that will cash in on this “ingenious idea”. As for the rest, well just leave them to their own devices. Advisers should only be interested in dealing with profitable sensible clients. By sensible I mean those that actually take our advice and act upon it. The rest can do whatever they like.
    As for the so called future FCA “value for money” tables they say they are going to produce I will just love to see how they decide upon what value for money looks like on Annuity re-sale. These are interesting time in which we live

  19. Nick

    What I think you (and those who are keen on these ‘freedoms’) overlook is that the general public see the opportunity to trash the cash and do the stupid thing – just as Osborne hoped they would. This is why you have ‘insistent clients’ who if advisers have any sense, should be sent packing. If this isn’t a tax grab then I for one don’t know what is. Not only annuity sales – which is complete financial, arithmetic and logical nonsense for everyone bar the single terminally ill person, but also for the ‘freedoms’ in general.

    I notice that some sense is beginning to prevail and annuity purchases are rising. Advisers don’t like annuities much as they are a once and for all deal, whereas drawdown allows you to maintain a steady income stream.

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