Personal Pension  

Chancellor delivers another blow to annuity market

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 If death occurs under the age of 75, no tax will apply even if the fund is withdrawn as a lump sum.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.”