Labour has branded Chancellor George Osborne’s announcement of the abolition of the 55 per cent pensions death tax as “shambolic” after the Treasury mistakenly told the market annuities would not be included in the reform.
The decision to axe the 55 per cent penalty was not due to be made until the Autumn Statement in December. However, Osborne decided to bring forward the announcement in a bid to recapture the initiative after Tory MP Mark Reckless defected to Ukip ahead of the Conservative Party conference.
While the original Treasury briefing said annuities would be excluded from the reforms, Money Marketing subsequently revealed savers with value protected annuities will in fact be able to benefit from the changes.
Speaking to Money Marketing, shadow financial secretary to the Treasury Cathy Jamieson says the Chancellor’s failure to properly communicate the reform caused “confusion in the equity markets” as some insurers’ stock prices plummeted.
She says: “In keeping with most of the other announcements at the Tory conference, George Osborne’s announcement of the abolition of the 55 per cent tax on pension funds at death was rushed and shambolic.
“The Treasury initially said the changes will not apply to annuities; now it turns out that they will apply to some annuities.
“This error led to confusion in the equity markets and a slump in the share prices of some annuity providers. This is not an isolated incident – Government pronouncements on pension reform have been riddled with confusion and error.”
Just Retirement, which saw its share price plummet 6 per cent in the wake of Osborne’s speech, recovered somewhat on Monday after Deutsche Bank issued a note saying the death tax reform – and in particular the inclusion of value protected annuities – had been “misunderstood” by investment markets.
Deutsche Bank said: “It should be noted that exactly the same change [to the death tax rules] has now been given to ‘value-protected’ annuities. In short, what it means is that future retirees should be able both to guarantee themselves an income for life and, if they die early, to have any remaining funds in their annuity paid to the heirs at the latter’s marginal rate of tax.
“This could actually result in an increase in annuity sales once again.”
Just Retirement director Stephen Lowe says: “It was not helpful to customers or investors to have partial information published last week. This created uncertainty and an incorrect interpretation by many commentators.
“Clarification was published on Wednesday confirming annuity capital can be passed to the next generation and benefit from the reforms to the treatment of tax charged on unused DC pension savings.”
Experts are also predicting the true cost to the Government of the cut to the death tax regime on pension savings could far exceed the Treasury’s estimate of £150m a year.
Aviva head of pensions policy John Lawson says: “£150m could be light and because a lot of people are advised it could well be beyond £150m. Rather than the death tax, the greater tax loss is going to be about the inheritance tax – I’d expect inheritance tax take to reduce significantly as people of modest means now have a way of avoiding inheritance.
“Pensions could become the vehicle of choice for passing on capital to the next generation. If you work in estate planning this has changed the world completely, it opens up a whole range of possibilities and involving the whole family.”
Lawson adds the Treasury’s inc-ome tax take might also fall as people who previously tried to run their pensions down to avoid the death tax, instead retain their pot size.
Old Mutual Wealth retirement planning manager Adrian Walker agrees the Treasury’s loss “could possible be a lot higher in the long term”. He thinks the figure has not taken into account all the new costs that could result from the death tax changes.
He says: “What about the increased tax relief cost to the Treasury as people who weren’t previously putting money into pensions starting doing so because of the death benefits?”
“We still need a few more answers – for instance, will abolition of the tax charge apply to each beneficiary when they die or will it relate to the age of the original saver? If so, in a few generations you could get massive pension funds; it’s potentially a fantastic inheritance tax planning vehicle. The outcome of those clarifications will impact on that original cost estimate.”
A Treasury spokesperson could not confirm how the £150m was calculated but said a more detailed estimate would be published as part of the Autumn Statement.