What’s the story?
The Chancellor will announce in his speech at the Tory conference that he will put a stop to the 55% tax on pension pots not spent at death.
The Treasury announcement on what detail we so far have is here.
If you die before 75 your nominated beneficiary gets your pot tax free
If you die after 75 your beneficiary pays tax on your pot either at his or her marginal rate (if its paid in instalments) or at 45% if they take it as a lump sum. The intention is to move to rationalise this by 2017 into a single system based on marginal rates.
What’s the point of the changes?
The point of the 55% tax was to stop pensions being used as a tax-shelter for the uber-rich who don’t need any more income in retirement and to encourage people to insure against old age by purchasing longevity protection (aka a pension annuity),
But like annuities themselves, the Chancellor no longer sees the point.
With staggering percipience, the BBC report that Osborne will say
“People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free.
“The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down.
“Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free.
“Not a promise for the next Conservative government – but put in place by Conservatives in Government now.”
The small print will emerge in the Autumn Budget. A price tag of £150m a year will attach to this giveaway, to be shared by around 320,000 inheritors a year (a tax saving on average of £500 per pension pot).
There’ll be immediate pay-back if it leads to Conference talking about popular budget reforms and not defections to UKIP.
It will certainly go down well in the City who will see this as another boost to the “wealth” industry and a kick in the goolies to those advising on pensions – whether annuities, defined benefit or defined ambition. It will do nothing for the sale of Lamborghinis.
What sceptics will be asking
It seems to me a policy that begs further questions;
1. Is this really a hand-out (as it seems at first sight) to the filthy rich?
2. Is this part of a wider move towards self-funding of long-term care?
3. Is this just a gimmick that masks the horrible inadequacy of pension savings and the probability that most people not buying an annuity will outlive their savings?
4. Will death benefits become another reason to want to “liberate” DB (and in future DA) plan benefits?
No doubt these will be the questions Rachael Reeves and Gregg McClymont will be asking from the Labour benches.
What this will mean in practice
For me, this tax-change is headline grabbing but not substantial. The Chancellor is taking a bet on feckless behavior by the British pensioner at retirement, the savings to the tax-payer are dwarfed by the tax-take on pension busting by those “taking it all at once”.
So the chancellor is already relying on people behaving in their worst financial consequences, this measure panders to the shallow optimism of those parts of the financial community who see pensions as wealth rather than insurance. It is irresponsible
The tax-change could lead to bad social consequences, especially between those in a family who would benefit from annuity purchase (the people who own the pension pot) and those who won’t (those inheriting the pot).
If you of an age, ask yourself how you would explain to your kids that you’d just signed away their pension by buying an annuity.
If you are young, ask yourself how you’d react to hearing of plans by your parents to swap your pension inheritance for an income stream that ended when they did.
Such questions do not feature in the wealth manager’s list of considerations, (for it is the wealth managers not those insuring against poverty who will applaud the Chancellor).
The real winners
It will be the readers of the Mail, not those of the Sun (or those that cannot read) who will be cheering this giveaway. But the real winners will be those with massive Self Invest Personal Pensions for whom DC pension plans are primarily a tax-planning wheeze.
I worry that this is how UKIP impacts policy, let us hope that the “I’m alright Jack” self-sufficiency of middle England is not just a chimera. Middle England is not alright when it comes to retirement income and to suggest that pensions wealth is likely to cascade down the generations is to hide the reality.
The wrong message
Most of middle England is debt rich, housing rich and income poor and this policy does nothing to help people plan for old age; it is a kick in the goolies for “pensions” and a kick in the nuts to those trying to deliver financial education responsibly to those in, at or approaching retirement.
So for all the applause it will receive at the Conservative Party Conference, this giveaway leaves me with a pain in my lower stomach.