Recognition of pension investment ‘super power’ means escape from tax relief cuts and no new ‘death taxes’. But missed opportunity to increase ‘Money Purchase Annual Allowance’ to support post pandemic pension planning says Steven Cameron, Pensions Director at Aegon.
Cameron comments: “It’s very welcome that across Government, there’s growing recognition of pension schemes’ ‘super power’ to invest the billions of investments they manage for their members to support green economic recovery. The plans to be more flexible around the charge cap for workplace pensions default funds which invest in illiquid investments is a further signal of its intentions. This investment focus may be one reason why pensions have escaped any further cuts in tax relief in today’s Budget. It may also be why the Chancellor has not changed the tax treatment of pension death benefits despite some commentators labelling these pre-Budget as ‘indefensibly generous’.
“While the DWP promotes pensions as a critical means of saving for retirement, it’s often been speculated that the Treasury views them more as a drain on income tax receipts because of the tax relief pension contributions receive. We hope this new mindset will discourage Chancellors present and future from whittling down pension tax reliefs further.
“However, we’re disappointed to see no relaxation of the Money Purchase Annual Allowance. This would have offered welcome relief to those over age 55 seeking to rebuild their pension plans post pandemic.”
Pensions escape death taxes
“While pension death benefits were described by some in advance of the Budget as ‘indefensibly generous’ bringing them into scope of Inheritance Tax would have been at the extreme end of the spectrum of wealth tax reforms. It would have had a multitude of knock-on consequences, potentially impacting millions of people, and in many ways would go against core pension policy objectives of encouraging people to save adequately for retirement, with the freedom to use their accumulated funds flexibly throughout retirement.
“When saving in a pension, the vast majority of people are doing so to provide an income for themselves, and a partner, in retirement, rather than passing on an inheritance. So bringing accumulated pension funds or ‘death benefits’ into an individual’s taxable estate on death would seem particularly harsh and unjustified. We need to encourage more people to save more into pensions, and creating a possible tax liability for ‘good behaviour’ would be highly counterproductive.
“Since the pension freedoms were introduced around 6 years ago, an increasing number of individuals with defined contribution pensions are deciding against using their pot to purchase an annuity and instead to keep the fund invested and ‘draw down’ a flexible income. Under drawdown, funds remaining on death can be passed to a beneficiary free of IHT although on death after age 75, beneficiaries pay income tax on any income taken. But changing the rules here and making any remaining funds on death subject to IHT would also encourage individuals to avoid leaving money in their fund and instead to take more income sooner, increasing the risk of them running out of money while still alive and well. This would undermine the whole concept of pension freedoms.
“Such a change would also have limited ways of funding in advance for an individual’s share of possible future social care costs. The government should be encouraging people to set money aside rather than whittle down their savings to avoid IHT. One option would be for individuals who opt to keep their DC pension invested and draw down from it, to notionally ringfence (and leave untouched) part of their drawdown fund in case they need it for social care. But the prospect of IHT on any remaining funds would make this far less attractive.”
“The industry has been calling for the government to raise the limit of the Money Purchase Annual Allowance, so the lack of any change will be a blow to those who may have been unknowingly caught out by its little-known rules.
“The MPAA means anyone over 55 who accesses their pension flexibly has any future pension contributions into a defined contribution scheme limited. This limit remains at £4,000, despite many calling for it to be increased to at least £10,000. Many individuals have been caught unawares by dipping into their pension during the pandemic for short-term financial support. We remain keen that the limit is increased to £10,000 to give individuals more freedom to get their retirement planning back on track. While these rules were introduced to stop people recycling their pensions tax free cash lump sum, the reality is that it is punishing hard working people.”