Today George Osborne reiterated in his Autumn Statement speech that the 55 per cent ‘death tax’ on pensions would be abolished, along with the addition of joint life annuity policies that had been pre-announced in recent weeks.
“I confirm that the 55 per cent death tax that currently applies when you pass an unused pension pot on to your loved ones will be abolished. I can also tell the House today that we will ensure that people who die before the age of 75 with a joint life or guaranteed term annuity can pass that on tax free too,” he stated.
Malcolm McLean, senior consultant at Barnett Waddingham, commented that the pensions industry were likely to be relieved the statement contained no further significant changes, as it seeks to prepare for the once-in-a-generation overhaul in April.
“There is still a lot of work to be done to implement and educate the public about the Budget changes, and the pensions providers and indeed the pensions industry as a whole will no doubt be breathing a collective sigh of relief due to the uneventful nature of today’s announcement.”
Alan Higham, retirement director for Fidelity Worldwide Investment, agreed that there were no real surprises this time round.
However, Mr Higham also hailed the move to equalise treatment of drawdown and annuities, though he highlighted that a discrepancy continues to exist in relation to defined benefit schemes which could prompt a spate of transfers.
“It is sensible that annuities and drawdown products no longer have a particular bias, however, I would highlight that it does create a slight anomaly for those who are still in a DB scheme as, unlike their DC counterparts, they are not able to pass on their benefits tax free.
“With the news that those in DC schemes are able to do this, it would be unsurprising if those who are in ill health and in a DB scheme did not look to transfer out on generous terms.
“If so, the DB scheme concerned would be left with honouring these generous transfers out while continuing to hold a significant longevity risk for their remaining healthy members.”
He added that on this basis, it is possible that DB schemes may quickly introduce some form of medical declaration or underwriting with differential transfer values offered.
Claire Trott, head of technical support at Talbot and Muir, also welcomed the lack of further tinkering.
“There are still a good number of outstanding issues on the new legislation that should be prioritised over additional changes, such as making the death benefits for all comparable, especially those in defined benefit schemes who currently won’t have the same possible tax free option for dependents benefits, unless they have been bought out by a lifetime annuity.”
Billy Burrows, associate director at Key Retirement, stated that the chancellor’s confirmation that people who die before the age of 75 with a joint life or guaranteed term annuity can pass that on tax free means a levelling of the playing field with drawdown.
“If the rules on the taxation of joint life annuities had not been changed it could have resulted in many beneficiaries being worse off because they would paid tax on their joint life income if the annuitant had died before age 75, whereas there will be no tax to pay on income from a drawdown policy if the plan holder died before age 75.”
Andrew Tully, pensions technical director at MGM Advantage, explained that for deaths after age 75, a dependant’s pension or remaining guaranteed installments will be taxed as income in the hands of the recipient; again in line with drawdown.
He noted however, that this change will only benefit the estate of those who die before age 75.
peter.walker@ft.com
