The UK Treasury’s decision to scrap a 55% tax on pension savings at death, dubbed the “death tax”, has been described as both “nothing short of revolutionary” and “a niche policy”.
Chancellor George Osborne announced yesterday that from April next year, individuals will be able to pass their unused defined contribution (DC) pensions to a nominated beneficiary when they die without paying the 55% tax charge that currently applies.
Individuals with a drawdown arrangement or an uncrystalised pension fund will be able to nominate a beneficiary to pass their DC pensions to if they die. If the individual dies before 75, they will be able to give their remaining DC pension to anyone as a lump sum completely tax-free if it is a drawdown account or uncrystallised.
Every year, about 320,000 people retire with DC pension savings.
Chris Williams, chief executive of Wealth Horizon, says that while the idea will grab headlines, only a small number of people will benefit – those who retire with DC pensions and die before 75.
“This is a niche policy,” he says. “While this is a step in the right direction, the government needs to be looking to encourage more saving and investment in preparation for retirement.”
Williams warns that a lack of preparation for retirement is at the core of the problem, and that tax policies like the one announced yesterday are unlikely to matter because most people do not have a pension for the government to tax.
However, John Fox, director of the pension provider Liberty Sipp, says such a sizeable tax giveaway is more than a quick headline-grabber.
“It is the final stage of a set of pensions reforms that together are nothing short of revolutionary,” Fox says. “The pension industry is steadily being reborn – forced to develop new products and jettison years of hidebound complacency – and savers are changing the way they see pensions.”
Fox says it could also deliver the “coup de grace” to the annuities industry, which has been under pressure since new freedoms were first announced in the budget.
He adds: “The combination of the freedom to do what they want with their pension pots – and the reassurance that anything they don’t spend in retirement can be passed on to their loved ones – will encourage more to save harder.”
Mark Wood, chief executive of JLT Employee Benefits, says the new policy is fair because a greater proportion of an individual’s wealth can be passed on to beneficiaries. This should avoid what is effectively an extension of inheritance tax at a higher rate.
“The move should encourage people to save for their retirement, cementing as it does the idea that retirement funds remain ‘my money’,” he says.
Alan Morahan, head of Punter Southall defined contribution consulting, however, warns that the new policy may influence decision-making.
Morahan says if retirees place too much importance on passing their pensions on to their families tax-free, they may end up not making the right decisions for themselves.
Fox, of Liberty Sipp, says the new policy is likely to torpedo many of the offshore schemes which have sprung up to get round the current tax rules. “More pension money will be kept onshore, and Britain will have one of the most heavily incentivised pension systems in the world,” he says.
“The pensions industry must continue to respond by offering people simple, attractive products that allow them to make full use of their new freedoms. If that doesn’t get more people saving for their retirement, it is hard to know what will.”
Yet Fox remarks that “even the most charitable observer could not fail to find the timing a touch fishy”, coinciding as it does with the Conservative Party conference, which has been marred by scandal and a defection to the UK Independence Party.
Fox says that “after the Tories’ tempestuous weekend, the chancellor has clearly decided to generate some positive headlines for the party conference”.
©2014 funds europe
