By Gerald Davies, executive chairman, Kymin

 

On Monday of last week, September, 29 at 18.47, George Osborne sent me an email. As it was my birthday I thought: “How nice, George has remembered.”

But no! It was a press release, following his speech to the Conservative Party Conference.

The most important part of the speech, many will think, was that concerning access to pensions.

To quote George: "People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. I’m abolishing the punitive 55 per cent death tax altogether.”

The questions that we at Kymin expect to be asked are:

When does this change come into effect

From next April , in line with the other pension changes announced in the Budget last March.

What is happening now?

There will be no changes to pension payments made before April 2015

What happens if I am retiring before next April?

Savers retiring today can ensure they fall under the new rules by delaying their payments until April2015.

What exactly happens after April 2015?

When death occurs before age 75, funds are passed on completely tax-free and no tax is payable on withdrawals from that pension, whether taken as a single lump-sum or accessed through drawdown;

Also…

If the pensioner dies post 75, no tax is payable when the pension is passed down, however, the beneficiary will pay at their marginal rate of income tax on any withdrawals.

What about income from annuities?

Dependants’ pensions from annuities and scheme pensions, such as final salary schemes, will continue to be subject to income tax at the beneficiary’s marginal rate.

What effect will these changes have?

We believe that the changes, both at the Budget and now, will over time, hugely affect people’s attitude to pensions and the place they have in everyone’s financial planning.

We have always been generally in favour of drawdown, as opposed to annuities.

People will be keener to save through a pension plan. This is not just for the tax-relief received on all money invested, nor for the tax-free growth gained within a pension. This has always been the case. The change in the budget gave savers accessibility to their entire pension pot when they retired, or any time after. These new proposals from the Chancellor will mean that the money they have saved can be passed down to their loved-ones, either completely free of tax, or at the beneficiaries tax rate, and then only when drawn down.

To show what a remarkable series of changes these have been, you only need to go back 30 years, during all of which time I have been a pension adviser.

In the 1980s, you only rarely had the ability to exercise an Open Market Option. In other words you could shop around for the best annuity rate offered. However, this was only if the company rules allowed it. Otherwise you were stuck with whatever rate you were offered. This was clearly unfair.

Gradually companies offered you the right to shop around, but you were still stuck with buying an annuity. These were inflexible and often offered bad value.

Then in 1995 came the big change. Income Drawdown was announced. Halleluiah! At last you began to be treated like adults. This new system meant you remained in charge of your money. Your money remained in a tax free fund, growing faster than in any other situation. But there were still rules and regulations about how much of your drawdown account you could access. These were known as the G.A.D. (Government Actuary’s Department) rules (don’t ask).

Now, in 2015, you will be able to draw as much of, what is after all, you own money, as and when you like. Not only has that, but the taxation of your pension pot been hugely reformed.

No longer will you be encouraged to draw as much as possible for fear of the iniquitous 55 per cent tax on what’s left when dying after age 75. That has gone altogether.

Whatever you political persuasion, you should silently thank George for this huge improvement to personal pensions.

I predict that there will be a sea change in people’s attitudes to saving for retirement. An adequate income for the elderly is in everyone’s interest.