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Osborne set to scrap death tax on joint-life annuities

Chancellor George Osborne is expected to use next week’s Autumn Statement to cut the tax paid by widows and widowers on annuity payments after their partner’s death.

At the Tory party conference, the Government announced it was abolishing the ‘death tax’ normally paid on pensions in payment if the member died before reaching the age of 75. If the member dies after 75, the remaining pension is taxed at the beneficiary’s marginal rate of income tax or 45 per cent if taken as a lump sum. However, this only applied to drawdown pensions and value protected annuities, not conventional contracts.

Currently a widower is taxed at their marginal rate if they continue to take the annuity as stream of payments.

But the Financial Times reports the Chancellor will use his last Autumn Statement before the general election to include annuities in the proposals, meaning no tax would be due on payments if the member died before 75.

September’s original announcement on the tax changes caused a wobble in insurers’ share prices as the move was seen to be favouring drawdown over annuities.

Annuities sales have continued to fall since last March’s Budget.

Legal & General pensions strategy director Adrian Boulding told the newspaper: “If this inconsistency is corrected then it would be very good news for the industry and for the widows and widowers receiving income from joint-life annuities.”

Yesterday, the FCA revealed it is investigating the non-advised drawdown market in response to growing concerns savers make poor choices when accessing their pension flexibly after April next year.


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. In the current climate of age equality for retirement, insurance premiums etc., could someone please explain to me why this magical age of 75 still exists? Why is there an, albeit, slightly reduced tax on those who die after that age, but no liability for those who die before?

  2. @Paul

    Quite right. Todays youngster probably won’t reach retirement age till 75 anyway! Indeed many are working beyond that now – – Look at Bernie Ecclestone. He’s worried about the tax on his pension!

  3. This is a victory for common sense – without this change there would have been an unlevel playing field between annuities and drawdown

    Who knows, there might be more interest in investment-linked annuities for those with funds which are too small for drawdown

  4. There is also the opportunity for innovative annuity providers to offer a new type of annuity which decreases by 20% if death occurs before 75 or stays the same if after?

  5. Older folk (myself included) vote…….

  6. If I have understood correctly, it will be necessary to have some sort of device to prevent pensions simply or mainly being used for Inheritance Tax avoidance rather than primarily for providing a pension for the person who sets them up. Thus not applying the Inheritance Tax exemption or other favourable tax treatment when the scheme contributor dies after reaching the age of 75 would be a crude way of achieving this.

  7. So, for the unqualified ‘guidance’ experts who are to be put into existence, they need to outline 1) Lifetime guaranteed annuities 2) Investment-backed annuities 3) Temporary Purchased annuities (all with or without spousal benefits) 4) Capped Drawdown 5) Crystallised Flexible Drawdown 6) Uncrystallised existing contract withdrawals (where only 25% may be TFC, so this will catch a few out), et al.

    As well as this will be the need to outline the perils posed by exceeding the annual allowance limitations whether intentionally or unintentionally. I don’t think it’s going to be an easy process; I would struggle to guide people through these in under an hour, never mind over a phone or in writing (which will not help as we already know)…Good job they won’t be accountable for the guidance or need to provide a suitability letter, because that will run for many more pages than Roy would like to see.

    The consequences of hurriedly announced changes by people who clearly do not understand the industry and its already complex array of offerings. I actually feel for the FCA having this dumped on them by Govt.

  8. I agree with Steve D

    For the Government it is about freedom – for the FCA regulation

    These do not go together well

  9. So does this mean that the new BCE5C (which according to initial proposal would only apply to lump sums or drawdown pensions from uncrysallised funds) will now apply to dependant’s annuity purchased from uncrystallised funds? What about dependant’s scheme pension?

  10. @Billy Burrows

    Please don’t mention the word Freedom when referring to pensions as long as people are dragooned into AE.

  11. @ Markco and others

    Concerning dependant’s scheme pension, I have always understood that non-spouse dependants usually had their entitlement expressed as being at the discretion of the scheme, amongst possible other reasons because the inheritance tax law on such benefits at the time of death could not be predicted with any accuracy at the earlier time when the premiums were being paid. It was expected that the value of a discretionary pension would be assessed as nil for inheritance tax.

    These terms were drawn up in the days when pension providers were expected to be mindful of their reputation and inclined towards honesty. Hopefully they still are.

  12. @ Paul (re first comment) your question was asked at a recent Money Marketing Retirement Planning Invitational (about the 75 age threshold). There was no definitive answer provided (by the expert panel) but it was thought that it (the 75 threshold) remained “because it always had”. Good enough reason?!

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