Ageism rules OK!

January 2007

by David Baker Legal Director Wealthtime

The population is aging rapidly.  The demographics we are told are frightening.  We will all have to work longer and save more for our retirement.  The government is committed to stamping out age discrimination in the workplace as shown by the recent legislation yet when it comes to their treatment of people in retirement the opposite seems to apply.  The latest attack from the Chancellor on ASPs ensures that if you live beyond 75 having saved up a decent pension fund you get clobbered.  Better to die young and/or spend it?!

From next April if you die one day before your 75th birthday you can leave your entire pension pot to anyone you want to free of IHT or any other tax provided you have not taken any benefits and your fund is below your lifetime allowance.  Even if it exceeds your lifetime allowance limit the lifetime allowance charge of 55% only applies to the excess. If you die on the same day having taken benefits there is a 35% special tax charge this time on the whole fund and again no further tax charges including IHT apply.

Contrast that situation with the person unfortunate enough to live one more day.  That person, at the age of 75 suddenly finds their entire fund, if paid as a lump sum, is subject to a swingeing tax charge of 82% if their estate is subject to IHT the 70% unauthorised payment charge introduced in the pre budget report regardless of size of fund, and on top of that the 40% IHT charge on the remainder.  A rate of tax last seen in the early 80's. 

This penal tax charge has succeeded in making ASPs much less attractive whilst avoiding the difficulties of religious discrimination but what about age discrimination?  To say it is unfair is an understatement.  Why, having introduced complicated new rules for persons not wanting to purchase an annuity at 75 just 9 months ago is it thought necessary to change them so radically so soon?  Death benefits are not the only change  if you are over 75 you are now to be forced to take a pension whether you like it or not under 75 you have the choice.  However, one could argue over 75 you might as well now take the increased maximum pension and use up as much as your fund as possible before you die because if you don't the tax man will take it in the end anyway.  If you live longer than expected and have used up your fund you then become dependent on the state.  Where is the logic in that!?

Why was this done?  It just seems to have been prompted by the belated realisation that people would actually use their new found freedom not to purchase an annuity at 75 - a requirement that was universally condemned whatever your particular religious views.  But why this obsession with preventing the passing on of pension funds on death over 75 when it is deemed OK before 75?  Is it driven by the fear of a reduced annuity market leading to reduced demand for gilts?  Is it that people are to be discouraged from opting for ASP because they are not thought capable of managing their own money as they get older?  Or is it part of a more general politically motivated desire to prevent pension funds being passed on at all?  It may well be a combination of these factors.  Could this mean that death benefits under 75 are also potentially under threat?  Perhaps, as referred to earlier the differential before and after 75 has become extreme, is regressive taxation at its worst, and is totally unjustifiable.  It is reminiscent of the old days of Estate Duty where the desire to survive 7 years from the gift sometimes lead to an earlier demise due to the strain!  At least there one had a reward for surviving,  here longevity is only penalised.  If you are in serious ill health as you approach 75 with a substantial pension fund think of the temptation???.

The whole focus on 75 needs a substantial rethink anyway.  Taxation in a modern economy should not be dependent on a single arbitrary date.  In times when we are living longer and being forced to accept later retirement and the later payment of the state pension it just does not make sense.  The industry should lobby to get these proposed changes reversed and for the abolition of this arbitrary ageism.  Who's with me?

Send your comments to David Baker.

This represents the views of David Baker and is not a substitute for professional financial advice.


Go back