Towers Watson comments on the Chancellor's Autumn Statement 2014.
Tax-free spouses' annuities where death before 75 – what about scheme pensions?
The Chancellor confirmed that payments from joint-life annuities will be tax-free where the member dies before 75 (Autumn Statement, paragraph 1.222).
Will Aitken, a senior consultant at Towers Watson, said: "This levels the playing field between drawdown funds and annuities, but why won't spouses' pensions from occupational schemes also be tax-free where the member dies before 75?
"The most likely answer is that, while only around one-third of annuities provide spouses' benefits, these are standard issue in defined benefit schemes: the projected £155 million cost in 2016/17 would be quite a bit higher if all survivors' benefits were treated in the same way. However, if the Chancellor did intend to extend this treatment to spouses' pensions, staggering the announcements would give him more bites of the cherry in terms of positive headlines.
"The ONS projects that only 15% of men aged 65 this year will die before turning 75, so most survivors' benefits from any sort of pension will remain taxable."
Single-tier state pension starting level will be higher than the figure in the Autumn Statement
The Autumn Statement says that "the full new State Pension will rise to at least £151.25 per week. The actual amount will be set in autumn 2015" (Paragraph 1.235)
Will Aitken said: "£151.25 is the lowest possible value for the single tier State Pension if it were being introduced in 2015. It won't actually be introduced until 2016. Based on the OBR's forecasts, an extra year's uprating should take it to at least £154.45. We wouldn't be at all surprised if the Chancellor announced a figure of £155 or so in the Budget."
Pension freedom and the public finances
The policy costings published alongside the Autumn Statement show a cost to introducing a lower annual allowance (£10,000 rather than £40,000) for people who continue to save in pensions after accessing defined contribution pensions flexibly, estimated to reach £120 million a year by 2018/19(p46).
Will Aitken said: "The £10,000 annual allowance was designed to limit the scope for over-55s to reduce their tax bills by repeatedly washing salary through a 'pension bank account' and taking it straight out again. By doing that, people could avoid tax on one-quarter of this income; no National Insurance would be due either if salary were exchanged for an employer pension contribution. Ministers have indicated that they will only tolerate this on a small scale but may have to take further measures to stop it.
It might be that the Government is starting to make some allowance for this activity in its numbers, having not done so originally. Otherwise, it's hard to see why a £10,000 limit on contributions would see more revenue lost than a £40,000 limit."
The Government also estimates that continuing to allow people to transfer out of funded defined benefit schemes now that defined contribution pots can be accessed flexibly will add a cumulative £1.15 billion to Exchequer revenues during the next Parliament.
Will Aitken said: "Much of this will be revenue brought forward from later years if people draw more money from their DC pots than they would have received from their company pension. Some people may also pay more tax over their lifetime if rushing to get the money out means paying more tax at higher rates. The Autumn Statement does not say how many people the Government assumes will transfer – perhaps it does not want to create an expectation here."