Pensions revolution: Tax relief for over 75s in the pipeline
The government has proposed to 'amend or abolish' the current rules that mean people aged 75 or older are denied tax relief if they make pension contributions.
The rules have their roots in the pre-2010 tax regime, when retirees had to buy an annuity by the age of 75.
The changes introduced in 2010 enabled people to stay in flexible income drawdown beyond age 75; but if they did so, they were not allowed to make further tax-advantaged contributions to the pension fund. The aim was to avoid the potential for the 'recycling' of pension income.
The 2014 Budget documents outline plans to 'explore with interested parties' whether the existing tax rules should be revised.
Discussions have yet to be held, but such a change would be likely to enable older people who, for example, are still working and contributing to their pension funds at the age of 75 to continue to benefit from tax relief at their marginal rate, in line with the rest of the population.
Commentators point out that with a growing trend for people to work past the state pension age and for 'phased' approaches to retirement, it is inappropriate to impose an arbitrary age at which tax relief should end.
However, Neil Lovatt, product director at Scottish Friendly is cautious about the proposals, on the grounds that pension contributions could be used as "an advanced form of inheritance tax avoidance" by very wealthy individuals.
"By gaining relief and moving substantial assets within their pensions, the wealthy will be able to avoid inheritance tax on considerable parts of their estate. Although this move would incur a tax charge [of 55 per cent], it would only be taking back tax relief that was never used," he warns.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says he expects some kind of cut-off point for tax relief on pension contributions, in order to prevent recycling of funds.
"As long as you're still working you should still be eligible for tax relief, so it would have to end at the point at which you start drawing down an income from your pension fund," he suggests.
This article was written for our sister website Money Observer
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.