Personal PensionSep 29 2014

Chancellor delivers another blow to annuity market

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Today’s (29 September) announcement that the 55 per cent ‘death tax’ on pensions is set to be abolished was welcomed by providers, however several warned that this is yet another nail in the coffin for an annuity market that is still reeling from a radical overhaul announced at the Budget.

Chancellor George Osborne will announce today that from April 2015 individuals will have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die.

As it currently stands, where a person dies aged over 75 the 55 per cent tax charge applies to the whole fund, regardless of whether the customer had taken any withdrawals from their pension. Where a person dies before the age of 75 and has started to take withdrawals, it applies to the “crystallised fund”.

He is expected to state that pension funds will no longer be subject to the 55 per cent tax charge when transferred as a lump sum within a pension, regardless of the age of the policyholder. If death occurs under the age of 75, no tax will apply even if the fund is withdrawn as a lump sum.

Around 320,000 people retire each year with defined contribution savings who will no longer have their pension savings taxed at 55 per cent on death.

Mr Osborne is expected to announce the new rules at today’s Conservative party conference. The measure will apply to all payments made from next April and, according to FTAdviser sister publication the Financial Times, it is initially expected to cost the Treasury £150m.

Matthew Phillips, managing director at Broadstone Wealth Management, welcomed the news but noted that there may be a negative impact on the annuities market.

Mr Phillips said: “It will have a small negative effect on the annuities market. Some people will have chosen to buy an annuity in the past [and] now they really don’t have to - why would they?

“In terms of the general changes that have already occurred, this is just another step in those changes and will make annuities potentially more unattractive.”

Mr Phillips added: “Personally I think this is a great step because it will give people more control.”

Claire Trott, head of technical support at Talbot and Muir welcomed the move too, but agreed it would be another blow to the annuities market.

“It’s another blow to the annuities market quite clearly because people will be reminded of the restrictions on death to annuities. It’s one more negative to annuities.

“Generally it is a positive for the pensions industry because it will encourage people to save and not take money out too quickly if they don’t need it.”

Ros Altmann, the government ‘older worker’s champion’, agreed this was yet another reason not to buy an annuity.

She said: “These new measures are also another nail in the coffin for annuities. Any money that has been used to buy an annuity cannot normally be passed on to the next generation (unless there is a guarantee attached), whereas funds in drawdown can pass on free of tax in future.”

Adrian Walker, retirement planning manager at Old Mutual Wealth believes the new rules will see an uptick in the demand for advice, as well as creating an opportunity for advisers to speak to clients surrounding the new rules and their retirement planning options.

Speaking to FTAdviser, Mr Walker said: “There should be an increased demand for advice and we would expect there to be.

“The difference with this [compared to the Budget announcements] is its about what’s left after death, so it has an impact on how people will take their retirement income and how much they need to take from a retirement income perspective.”

Speaking to FTAdviser, Julie Hutchison, Standard Life’s head of customer affairs, said: “This is fantastic news - one of the things that people had concerns about was that this died with you. This allows you to save for yourself and provide for your loved ones too.

“It considerably simplifies [pensions inheritance] in comparison to the previous system. It will make people much more aware of income tax; being income tax savvy will be a new priority.”

Dr Yvonne Braun, assistant director and head of savings, retirement and social care at the Association of British Insurers said: “Providers will wholeheartedly welcome this change which we had asked ministers to consider.

“A 55 per cent tax charge if someone dies before they have accessed their pension fund goes against the grain of the wider government policy of making pension saving more popular by giving people more options on how to use their retirement savings. This is a sensible move which deserves support.”

Malcolm McLean, senior consultant at Barnett Waddingham, said: “In an ideal world all tax charges on pension funds inherited on death would be abolished without a distinction between those aged under and over 75, or at least would only apply where the death occurred at a later age than 75. (Given that people’s life expectancy continues to rise could 80 be the new 75?).

“Under the circumstances, however, the chancellor has probably gone further than many in the pensions industry expected and is to be commended for making the changes he has now announced.”