An arrow in the heart of collectivism

Alan Collins

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This week, George Osborne kept up his pension reform theme and proposed the abolition of the so called “death-tax” on pension pots.

In doing so, he has further tipped the pension balance away from collectivism and defined income towards flexibility and individualism.

Summary of proposed changes

The changes only affect money purchase/defined contribution arrangements.  There are no changes proposed for final salary/defined benefit schemes.

Also, pension pots above the Lifetime Allowance will be subject to the same tax system as before.  That is, the excess above the Lifetime Allowance is taxed at 55% if taken as a lump sum (or 25% if taken as income, in which case income tax is levied in addition).

Currently, an “untouched” pension pot can be passed to a dependant free of tax if the deceased individual is under age 75.  If the deceased individual is 75 or over, the pot is subject to a 55% tax charge.

For pension pots that have already been accessed (i.e. the deceased has taken payment from the pot), the remaining pot is currently subject to a 55% tax charge irrespective of the age of the deceased (unless the beneficiary is a spouse/child less than 23, in which case there is no immediate tax charge, but (marginal rate) income tax is payable on any income received).

Come April 2015, the above will change radically:
•    Untouched pension pots will be passed on free of tax at all ages;
•    Pension pots that have been accessed will be passed on completely free of tax if the deceased is under 75; and
•    If the deceased is 75 or over, pension pots that have been accessed will be passed on with no immediate tax charge, but (marginal rate) income tax is payable on any income received.

What are the likely consequences?
Well, it is certainly trying to kill off collectivism by stacking all the cards in favour of an individual approach.  What are the chances of someone saying “Happy to join this group scheme and pass on my assets when I die to a bunch of random individuals instead of my wife and kids”?  Not likely, not likely at all.

We have had long debates in the office about the merits or otherwise of Collective Defined Contribution (CDC) schemes.  However, I suspect this may now be academic.  This is already a popular move and if it gets people more into the habit of pensions saving, then that in itself must be a good thing.  Like it or not, people will generally want to put themselves and their family first before they look to share their wealth for widely.  As such, employers are likely to keep away from CDC and focus on arrangements that will be more appreciated and valued by employees.

The further attractiveness of money purchase arrangements should also provide encouragement to employers seeking to manage their legacy defined benefit pension liabilities.  Employers should also review existing arrangements to make sure they are best aligned with the new pension freedoms.

 

Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.