Life and savings before death and taxes

Too late, sorry, time’s up. The deadline for responding to the Treasury consultation on “Removing the requirement to annuitise by age 75” was midnight last night. So, if you had a strong opinion on the Minimum Income Requirement or Limited Price Indexation, but somehow forgot to send it to Room 2/SE, 1 Horse Guards Road, London, SW1, then I’m afraid your views won’t be considered.

It’s all too easy to dismiss these consultations as exercises in petty bureaucracy or public relations – especially as the best of the 100,000 responses to the public consultation on cutting the budget deficit was, according to the BBC, selling civil service furniture on eBay. That just leaves another £154.99bn to find.

However, while most of us will have failed to read, let alone address, questions 1-10 in Annex A of the Treasury’s annuity document, we should be grateful that others didn’t.

This consultation can make a difference to us all, as it is about removing the barriers to saving that exist in the current pension system. So, I am delighted that many pension providers did get their submissions in before the doors to Room 2/SE closed last night.

Under the Treasury proposals, no one will need to lock up their money in an annuity ever again, as new forms of “capped” and “flexible” drawdown will allow us all to withdraw cash directly from our pension funds for as long as we like. But, whether this removes a barrier to saving arguably depends on how money left in a fund is taxed when a pensioner dies. At present, the tax rate is 35 per cent on death before age 75 or 82 per cent afterwards. Now, a new rate of 55 per cent has been proposed.

But this “death tax” is rightly being opposed by AJ Bell, Hargreaves Lansdown and many others. In its response to the consultation document, AJ Bell has proposed either a flat rate of 25 per cent, or 0 per cent on undrawn funds, 35 per cent on funds drawn before age 75, and 55 per cent on funds drawn from age 75. According to Billy MacKay, A J Bell’s marketing director, its survey of 580 investors and 300 advisers found that “nearly 90 per cent preferred these proposals to those of the government.”

This makes sense. Why should pension money left to beneficiaries be taxed at a higher rate than the 40 per cent levied on any other inheritance? In fact, shouldn’t the inheritance tax allowance of £325,000 be available to cover pension fund bequests? And why should there be any tax if the money goes straight into a beneficiary’s pension fund? Punitive tax rates deter saving.

We need more of this good sense to remove further barriers to saving – and thankfully, there is still opportunity to influence government policy.

The Workplace Pension Reforms Review doesn’t report its recommendations until 30 September. I hope it listens to pension innovators such as Hewitt Associates and Scottish Widows. At a workshop for FT journalists this week, Hewitt’s consultants explained how company pension schemes could be expanded to provide short-term savings schemes, help with mortgages, and ways to pay off student loans or credit card debt. Scottish Widows is aiming to offer a suite of alternative savings products to employees, via its MyMoneyWorks online company pension service. Standard Life and Friends Provident are working on similar solutions.

This all makes sense, as clearing debt and providing emergency savings will remove two more barriers to saving.

The Default Retirement Age consultation doesn’t end until 21 October. I hope Aviva has sent in a copy of its Real Retirement Report, which was published this week. It found that seven out of ten over 55s are forced to dip into emergency or income-generating savings to cover unexpected expenses, as they don’t have enough income from other sources. Allowing employees to work longer could mean the state pension ceases to be the largest single source of income they have.

This makes sense as being sure of a regular income removes a barrier to longer-term investing.

The European Commission’s Pensions Green Paper consultation doesn’t close until 15 November. I hope Aviva has a spare copy of its report for them, too, as the Commission wants to examine the balance of working time versus time spent in retirement. Aviva’s report found that, in the UK, today’s over 55s will have to fund an average of 25 years of retirement, from age 63, with just 44 years of work. That’s less than two years of pension contributions for every year of retirement income. For over 75s, who will have 30 years of retirement from age 63, it’s only a year and a half of contributions for each year of income.

Investing earlier and working longer has to make sense, as it can remove the biggest barrier to saving of all: futility.

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