It has been a rare party conference season this year. Two key Conservative MP defections to UKIP by Douglas Carswell and Mark Reckless are forcing potentially hazardous by-elections at exactly the time when the Tories need to be focusing their firepower on the next General Election in just eight months’ time.
However, perhaps more noteworthy still is the fact that George Osborne chose his keynote conference speech to announce the scrapping of the pensions ‘death tax’. There had been much conjecture that the Chancellor might cut inheritance tax on residual pension funds to 40 per cent, but instead he chose to scrap it altogether.
Although this positive change was slated for inclusion in the Autumn Budget statement in early December, political expediency demanded this early announcement. The change means the 55 per cent ‘pensions death tax’ will be pushing up daisies come next April. Thereafter it will be possible for anyone who dies to bequest any funds left in their Defined Contribution-based pension pot, free of tax – providing the recipient keeps those funds in a DC pension.
This is great news for the retirement savings world. However, as Ros Altmann points out in her Spectator blog post, it is another ‘nail in the coffin’ for traditional annuities, as annuity income cannot be inherited.
Over the summer we conducted a survey of IFAs, probing which recent changes are most likely to stimulate demand for financial advice. The largest number of advisers questioned – 30 per cent of them – said that the Spring Budget 2014 announcement of increases to capped and flexible drawdown would be the most influential factor in creating demand for advice. The scrapping of pensions death tax at the same time will be a further boon to the drawdown world. It may well also spur on product providers’ development of the new hybrid ‘guaranteed annuity’products which could be structured to make them ‘bequestable’.
Whether this change is timed to head off further defections to UKIP is unclear. We do know that many UKIP voters are older ex-Conservative voters and these people need to be won back before the next General Election. It certainly counters the bad press the Tories received following the so-called Granny tax changes in which personal tax allowance thresholds for older people, which used to rise with age, were first frozen and then scrapped altogether. This change hits middle income pensioners hardest and will apparently save the Treasury some £1.26bn a year by 2016-7. So some of that money is now being effectively ‘given back’ to the more cash-strapped next generation by eliminating the inheritance tax hit they would otherwise have to pay on remaining pension pots. It should benefit 320,000 people and will amount to a £150m tax cut, according to the bean counters.
Our view is that the immediate impact of the tax cut is only part of the picture. It sends out a pro-long term savings message which can only benefit the retirement market. It gives pensions savers another good reason to increase contributions to their pension pot, safe in the knowledge that the government of the day will not be grabbing over half of it on their death. (The Labour Party has already backed the change as well). It could also encourage a few pensioners not to cash in their pension to pay for that tempting sports car or luxury holiday. Industry insiders also noted that because this change only affects Defined Contribution schemes it is likely to stimulate anincrease in DB to DC asset migration.
Natanje Holt is managing director of retirement solutions provider Dunstan Thomas
