Pensions death tax plan ‘is threat to tax relief’
He said he could see why the point is raised and why there is a debate
but I am not sure it does what people want, trade
magazine Money Marketing reported.
Both Labour and the Liberal Dems favour a move to a flat-rate of
tax relief for all. If this single rate was set at 30 per cent, it would
cost the Government nothing, estimates suggest, effectively taking money
from wealthier savers and giving it to basic-rate taxpayers.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: The
ground has been prepared for a cut to tax relief with Mr Osbornes latest
pension policy.
Removing higher-rate tax relief now looks like a no-brainer for the
Conservatives and Id expect to hear more in the Autumn Statement in
December or in the election manifesto.
I cant see many higher-rate taxpayers grumbling, given the inheritance
tax benefits that they will receive (from the 55pc death charge being
removed).
The announcement by Mr Osborne on death duties represented the final piece in
the jigsaw for the pensions freedoms granted in the Budget in March.
From next April, savers will no longer need to buy an annuity to turn their
savings into income in retirement. Millions are expected to use the new
flexibility by leaving their pensions invested while taking out money as
needed.
Around 400,000 people already use these drawdown arrangements,
having eschewed annuities. They will be the immediate beneficiaries.
Under current rules, anything left on death can be passed to relatives, less a
punitive 55 per cent tax charge. This applies unless the deceased is under
75 and the recipient is a spouse, civil partner or a dependent child under
23. The charge has been deemed unnecessary by the Government and will be
removed before next years general election. He is expected to give more
details in the Autumn Statement in December.
A government spokesman confirmed that families who inherit the money will be
able to access it straight away. They will pay income tax on withdrawals at
their own marginal rates.
Ros Altmann, the pensions campaigner, said it would allow pension savers to
help grandchildren struggling to buy their first home, many of whom would
pay just 20 per cent tax on the withdrawals.
She said many people would be encouraged to keep money in their pensions,
rather than withdrawing it all when they retire and putting it in a bank
account. Many would have incurred unexpected tax bills if they emptied their
funds in one go, she said, as income tax is due on withdrawals. Savers were
also less likely to run down their funds too quickly, she added.
Malcolm McLean of pension consultants Barnett Waddingham said: It is
right and proper that savers can feel assured that money they have
voluntarily put away in a pension plan over many years and which they have
not fully used should pass on to their loved ones on their death without
some exorbitant tax charge being levied on it by the Government.
However, he joined those warning that tax relief could be reformed as the
Government seeks to cover pound;150 million loss of revenue. The Exchequer spends
around pound;30bn on tax relief every year. Tax relief works by refunding the
income tax savers would ordinarily pay. So it costs a higher-rate taxpayer
only 60p to put pound;1 of take-home pay into a pension.
Mr McLean said: The days of higher-rate tax relief are almost certainly
over and one way or another there are highly likely to be changes coming
soon.
There is a substantial amount spent on pensions tax relief and there
needs to be a radical review, but if we want people to save for retirement
and lock money away until age 55 there needs to be some incentive to do so.
Speaking at an event held to mark the party conference season Mr Gauke said:
There are two questions to be asked when we talk about equalising the
relief. Firstly, will it encourage greater saving from basic rate taxpayers?
And secondly, if lowering the relief for lower and additional rate taxpayers
is your objective then is it the best way of achieving that?
My response to equalisation is that I question it achieves either of the
objectives people hope it would. I can see why the point is raised and why
there is a debate but I am not sure it does what people want.
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