Value protected annuities have been included in new rules which will scrap the 55 per cent tax charge on death that applies to pension funds, the Treasury confirmed.
Yesterday (29 September), chancellor George Osborne unveiled a second wave of radical pension changes at the Conservative party conference by abolishing the 55 per cent ‘death tax’ on pensions.
Under the plans, pensions will be passed on free of tax. If a person dies under age 75 no tax will be payable even when a beneficiary withdraws income or takes the fund as a lump sum, with marginal rate taxes applying to withdrawals when death occurs after age 75.
All the initial discussions from the chancellor and the Treasury had focused on drawdown, which led many experts, including government pensions guru Ros Altmann, to talk of a further hit on individual annuities, with listed specialist providers suffering a fall in treading yesterday.
However, a small concession has been made for ‘value protected annuities’, for which savers pay an added premium to guarantee a payout after death if they die without receiving the full value of your pension fund. Such an extension means this lump sum will be paid free of tax.
Value protected annuities represent a small part of the market, and were effectively marginalised in 2010 when the government confirmed the 55 per cent death charge would apply to the lump sum payouts.
The Treasury confirmed the move at the time of writing. A spokesperson added rules may be extended to other areas as potential ‘further clarifications’ emerge.
John Perks, LV’s managing director said this will “balance things a little bit” following all the positivity about drawdown and the new tax benefits.
However, Mr Perks added he could not see value protected products growing in popularity.
He said: “If you have more money you are more likely to think about how you pass money on efficiently and drawdown is a more flexible product. But it does not change what an annuity is - it’s just about what the consumer wants.
“Do they want a blend of solutions? We don’t see an increase in value protected annuity sales as people don’t buy it for the death benefits. It’s an insurance product.
“I think there’s still a market, but it has obviously reduced. If you have a small pot you are likely to take it as cash, whereas if you have a larger pot you may be more risk averse and then an annuity is still a good way to get a guaranteed income.
“But I think we are moving away from single solutions. There’s definitely still a market place for value protected annuities, but it is more about blending and fitting different products to a person’s actual needs.”
