Monday, 24 March 2014
Annuities: a liberalisation too far?
Pension pots can be cashed in and splurged on a few cruises or a Lamborghini rather than used to buy and annuity, says the government, because people can and should be trusted to spend their own money as they wish. Sounds very liberal.
But is it their own money?
There is massive tax relief on pension contributions. Even for a standard rate taxpayer every £80 contribution is automatically turned into £100 be the government. Higher rate taxpayers have to claim but receive even greater contributions from the public purse (for details see hhtp/www.hmrc.gov.uk/incometax/relief-pension.htm) As I understand it, if a pension pot is "drawndown" beyond the existing tax free 25% the rest is taxed at the recipient's current tax rate. Thus it is possible to receive tax relief of up to 45% when amassing the pot, then, by a judicious manipulation of one's apparent income income on retirement, pay only 20%, or whatever is the standard rate, when receiving the jackpot. I'm sure clever accountants will have no difficulty in devising schemes to achieve this.
Tax relief on pension contributions, at least up to an amount sufficient to provide an income equivalent to, say, the median wage in retirement, is logical if the pension pot is actually used for its purpose. If it can indeed be splurged on any odd whim then surely the pension pot should be treated for tax purposes in exactly the same way as ordinary savings.
True, the present market for annuities seems rather cosy and the providers provide massive incomes for themselves in management fees and charges. The fact that pension pot holders no longer have to use them may sharpen up their competitiveness, but this seems like an inappropriate hammer to crack a nut. Surely effective regulation could achieve fairness for the bulk of pensioners without further favouring the already rich.
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