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.”