While recent Budget coverage has been dominated by the fabulous sleight of hand used by Gordon Brown to give with one hand and take with the other, the effect on pensions were slightly overlooked - mainly because all the measures were expected.
Brown did what everyone expected – he effectively killed pension term assurance (PTA), and did his best to kill off alternatively secured pensions (ASP) by confirming what some have called the “draconian” tax charges outlined in the Pre-Budget Report in December.
In addition, he finally made his move on scheme pensions - a legitimate tool which many in the industry have been using as a way for people to pass on their pension funds to beneficiaries and avoid inheritance tax.
In a consultation paper released alongside the Budget, HM Revenue & Customs (HMRC) says it has become clear “some in the industry are looking to design products to enable inheritance of tax relieved capital and the government plans to introduce measures to prevent such products from being used to pass down tax-relieved pension savings”.
However, while the government seems to think introducing tax charges similar to those applied to ASP will stop people passing on their pension funds, I would say it is perfectly obvious people are either going to suffer the charges or look for additional loopholes.
If people want to pass on their pension savings, they are going to find a way to do it the only difference is it is probably going to be while they are still alive rather than when they are did, using third party pension contributions; potentially exempt transfers (PETs) into trusts or possibly a new interpretation of the legislation.
As a result, it is unclear why the government is continuing to pursue a course which not only makes it unpopular among both the financial community and the general public, but also reduces its tax intake.
During the lobbying process the industry produced numerous arguments and figures which proves HM Treasury gets more revenue from tax on ASP than on annuities, while many in the industry accepted the need for a tax charge to offset the tax relief built up over a pension.
But while the industry suggested a tax neutral charge of 55%, the government has continued with plans for unauthorised payment charges of up to 70% of the residual fund, which combined with IHT and scheme sanction charges, could push the cost to around 82%, or in some cases even more.
It seems the consultation processes the government instigates over pension issues are simply a PR exercise to make it look like they are listening to concerns, but when they simply reject reasonable suggestions out of hand it is the government which is coming off worse.
As a potential election-winning Budget, Brown’s sleight of hand on tax has already backfired as people finally realise they won’t be that much better off – but once the tax implications of the pensions decisions finally sink into the consciousness of the general public, I think Brown’s quest for higher tax revenues may have limited his chances of staying Prime Minister for a long time.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
£300bn of liabilities
View from the front row
Transfer from occupational scheme
Appointed by FCA and PSR boards