AS PRE-ELECTION tax bribes go, the government’s latest pensions giveaway is something of a classic.
The hallmarks of a Tory gimmick are all there: it targets a tax that’s loathed by the middle classes; appeals to the grey vote; does absolutely nothing for those who really need support; and wins gushing media praise even though it benefits only a tiny minority.
The timing is pretty cynical too. If you’re not convinced that the policy has been hastily cobbled together, you should note that HMRC won’t be able to publish details until December.
That’s because the announcement was originally planned for that month’s Autumn Statement – if it had been approved. And that wasn’t guaranteed, because the government admitted in July that changes to the “death tax” could have “unforeseen and unintended consequences”.
It was right, and the Treasury is also acutely aware of the unintended consequences of the pensions “freedom” reforms set out earlier in the year. Then, as now, politics trumped common sense.
Don’t get me wrong. Scrapping “death tax” on pensions – meaning funds left in drawdown at death will no longer be liable to 55 per cent inheritance tax (IHT) – is excellent news for a small minority of pension investors. It also provides more incentive for people to build up their savings, in theory at least.
But the reality is that the advantages for the select few – relatively affluent savers who die before 75 – will be offset by significant long-term detriment.
By making drawdown more appealing, George Osborne has driven another nail into the annuities coffin, a disaster for the large majority of savers for whom annuities remain the most sensible option at retirement.
Income drawdown (where the pension fund remains invested at retirement and income is taken from it when needed) is a simple concept. But for those unable or unwilling to take independent advice it’s fiendishly difficult to carry off.
Could you put together a financial plan which gives you the income you need in retirement while ensuring your pension pot lasts as long as you do (all while factoring in additional costs such as care fees)? If you’re comfortable you can do that without professional advice then you’re in a small and possibly deluded minority.
Yet that’s exactly what thousands of people intend to do when the changes taking effect next April give them unfettered access to their pension savings from the age of 55. The end of the 55 per cent IHT charge on pensions will boost those numbers even further.
This all comes two years after the launch of automatic enrolment, which over time will result in millions of people paying into pensions for the first time. This was structured on the assumption that most people enrolled into workplace pensions would then buy an annuity at retirement, hence the urgent need for an annuity market overhaul.
The bulk of those people will still buy an annuity at retirement, but Osborne’s so-called pensions revolution will make it far more expensive – meaning they will get very little value for their savings.
While the scrapping of the “death tax” might on its own seem reasonable, it’s a component of a wider package in which individuals take on yet more risk and inequality is deepened even further.
Make no mistake: millions of ordinary savers, including those diligently paying into their work pension every month, will be worse off under these celebrated reforms.