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Obligation overhaul

A Tory Government could end the age 75 rule and bring in cash

So the election campaign is firmly under way and the Conservatives are pledging to get rid of the age 75 annuitisation rule and the infamous 82 per cent tax on pensions that goes with it.

For any of the handful of people potentially affected by the planned law change, the message has to be, don’t hold your breath. The chances of a Cameron Government actually putting this change on the statute book any time soon are slim at best.

If the Conservatives do get to form the next Government, it will not just be more pressing issues such as sorting out the nation’s finances that will push dealing with the annuitisation rules on to the back burner.

More significant will be the serious political risks that a speedy abolition of the obligation to buy an annuity will bring.

Ever since the banking crisis, bashing fat cats has become a favourite pastime in Westminster. Changing the rules so higher-rate taxpayers with huge pensions can avoid death duties would, rightly or wrongly, be depicted by their opponents as the same old Tories feathering the nests of their wealthy chums in the City.

The point was amply demonstrated at a recent event on the Conservatives’ plans for changing the age 75 rule hosted by Policy Exchange, the organisation dubbed David Cameron’s favourite thinktank.

Conservative Shadow Financial Secretary to the Treasury Mark Hoban discussed his party’s ambitions with regard to getting rid of the age 75 rule but accepted that thinking on how to do so is still at an early stage.

Most tellingly of all was the final question of the session, when one of Policy Exchange’s own researchers made the point that this policy change will do nothing whatsoever to deal with the pension crisis and is a sideshow for the vast majority of people.

What also became clear is pension providers’ antipathy towards the plan. Barry O’Dwyer, from Prudential, the life office that sponsored the event, argued that, while 75 years old should not be set in stone, we get rid of the requirement to secure an income at our peril as it does a valuable job for a large proportion of people.

Why would the pension industry support a policy that would see a large amount of money leak out of the industry?

Leakage was a concern for Hoban too. He has to make sure that any changes do not harm Treasury revenues. If the obligation to buy an annuity is removed, once an income to keep the individual off benefits has been secured, then a tax rate will need to be set for money coming out.

One provider, Talbot & Muir, is already allowing cash out of pension pots through accelerated pension withdrawal with an unauthorised payment charge rate of 55 per cent.

With the top rate of tax now at 50 per cent, this does not seem too painful, although many IFAs are yet to be convinced of the legitimacy of the process.

Hoban might find out, when he sits down and does the maths, that by setting a rate around this level he can raise a lot of cash for the Treasury very quickly by allowing the very wealthy to have their pensions, provided they pay back all the tax relief they have been given for the privilege.

Sure, this would erode future tax revenues but getting rid of annuitisation could prove a short-term money-spinner for the Treasury in this time of national hardship.

A Conservative Government would still need to deal with the sensitivities of giving the super-rich access to their cash. But by pitching the policy as clawing back excessive tax relief given to fat cats in the past, it might even get some political capital out of the exercise.

John Greenwood is editor of Corporate Adviser

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  1. Why should Mark Hoban be worried about possible loss of tax revenues? Pensions in payment are assessable for tax, so the more people who vest their funds and derive from those funds greater levels of income will be paying more tax.

    I really don’t like this Hoban fellow ~ he couldn’t see a simple solution if it bit him on the backside.

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