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Treasury reveals thinking behind end of pensions ‘death tax’

Treasury financial secretary David Gauke says the end of the pensions “death tax” will boost saving in the UK as he set out the Government’s thinking behind scrapping the 55 per cent charge.

Speaking at a fringe event at the Conservative party conference in Birmingham today, Gauke said removing the tax was a necessary extension of the Budget pension freedoms.

Gauke said the reforms are part of a Conservative and Liberal Democrat philosophy based on individual responsibility and greater control.

He said: “Our pension reforms mean people do not need to annuitise automatically, which creates a greater variety of pension pots and savings at death.

“Therefore the likelihood is that more and more people would have been caught up in a 55 per cent charge. That 55 per cent charge would come under much greater scrutiny as it is a pretty punitive rate. As we made clear [at the Budget] we needed to reform it.

“We looked at the various options and it seemed to us that it wasn’t sensible to have a big distinction behind the treatment of a crystallised pension pot and an uncrystallised pot. There was a strong case for consistency.

“If people died under age 75 with an uncrystallised pot then there was no charge to them. We didn’t want anyone to be worse off so the next logical step was to apply that to crystallised pension pots too.

“You are then left with the question of what you do with over 75s. Our view was that the idea of charging a marginal rate [to beneficiaries when they withdraw cash] seems fair.

“The overall effect of these reforms is that people will have more flexibility at retirement. That is something we should welcome. We know we have a problem in this country that we don’t save enough.

“For a relatively small amount of money – £150m, which is driven not by the tax cut but by the cost of pensions tax relief from people saving more – we believe it is the right thing to do in terms of a cultural shift.”

Pensions consultant Ros Altmann agrees with the tax cut and says it could open up the possibility of pension pots being used to pay for care.

She said: “This addresses one of the biggest fears from the initial announcement on pension freedoms – that there would be reckless spending and you’ll have nothing left. Removing this 55 per cent tax charge means there is a huge incentive now to keep funds in your pension pot.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Whilst welcoming these changes, can anybody explain to me why things suddenly change at age 75? The current average life span for a male aged 65 is 18 years, meaning that the average pension pot will still be subject to a “death” tax. Another point is that age 75 seems to have been the critical age for pension plans since they were introduced. With increases in longevity, shouldn’t this “critical” age be increased accordingly? …………. puzzled.

  2. Claire Trott - Talbot & Muir 30th September 2014 at 12:26 pm

    Looking at this all I am not sure the government is going to lose out at all.

    All those that would have bought annuities, and now considering drawdown may well spend all their funds before they die, even if before 75, so the government will get more tax – if they had bought an annuity the Government would not have got any tax on death anyway and a lower income tax whilst the member was alive.

    If they have a fund large enough to see them through to age 75 the Government will get their tax anyway.

    Those in ill health may well need their income to pay for care fees – so be forced to draw it as taxed income before they die.

    It may feel like a win for the consumer but the Government is not being as generous as they are making out, I feel.

  3. If the Government were to start closing expensive Final Salary Schemes then these new rules make it easier for them to ‘dangle a carrot’ in front of the members eyes. As an unfunded Final Salary scheme will die with them or at best their with their spouse. This will allow for their pot (if any left) to be passed on to their heirs.

  4. If the Treasury is on the path of rationalising pensions – in the sense of making their taxation more rational – they should also scrap the Lifetime Allowance. By all means limit tax relief on contributions if that is fiscally or politically expedient, but imposing the penal 55% rate on any excess above the prevailing LA is nothing more than a tax on successful investment performance – something all governments seek to encourage.

    A twenty-something new pension investor is likely to have around fifty years of investment. If good growth assets are selected at appropriate periods in the asset price cycles, it would not take a large annual contribution rate, nor an exorbitant growth rate, to significantly exceed the LA. The government has woken up to the fact that money may reside in a range of tax-privileged wrappers throughout life, but sooner or later it all comes out and re-enters the mainstream tax system. They need to encourage successful investment into economically productive assets, not penalise success.

    It may of course be that DB pensions would be limited on a different basis (particularly public sector schemes, and this may be the back-story), but DC schemes should not be inhibited by capping the LA from delivering good ‘pension’ income (to match the best DB schemes) derived from successful investment.

    Keith Robertson

  5. My concern is that tempted by the apparent benefits of pension funding and improved death benefits being introduced, moving forward savers will plough funds into pensions to find that the flexible retirement options are removed before they retire and death benefits reversed. Individuals need to know the basis on which they invest in pensions cannot be changed, as they approach retirement, at the whim of the Treasury as the need to balance the books. Pensions should not be used as a political tool, all parties need to have one policy with regard to pensions that they abide to in the longer term so pension savers no how benefits can be taken and how they will be taxed. This is critical.

  6. J Morris: A political wonk might say that with the statement “All parties need to have one policy with regard to pensions” you have missed the point of democracy.

    What do you want them to do? Introduce a law that they’re not allowed to make any new pension laws? In ten years’ time they’ll rewrite that law. Arf. It’s like Animal Farm: “Rule 94: To allow animals to save with confidence, the pension rules will not be changed…” (and then the next morning a new line had been hastily chalked underneath) “…unless it is needed to ensure financial stability / social equality / whatever.”

  7. Do people seriously believe this will encourage the average man in the street to engage with pensions?

    If people couldn’t afford it prior to the changes they can’t afford it now, whilst those that could afford it will continue to do so.

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