Pru attacks 'extreme' tax on unused pension funds

Prudential will lobby the Government to back down over plans to raise the charge on unused pension funds on death, which it says will disproportionately hit basic-rate taxpayers.

Proposals put forward last week by the Treasury would increase the single flat-rate "recovery charge" on unused lump sums remaining on death from 35% to around 55%.

Death benefits for those who die before age 75 without having accessed their pension savings will remain tax free.

Prudential's deputy chief executive, Barry O'Dwyer, broadly welcomes the wider Government plans to overhaul the income options available to investors at retirement, including removing the requirement to annuitise by age 75.

But he says the move to raise the on-death charge "lacks rationale" and will be felt mostly by taxpayers at the basic rate of 20%.

"The move to tax contributions at 55% on death is extreme and quite a whack for taxpayers on the 20% income rate. We will be arguing for that to be lowered."

O'Dwyer says wider proposals enabling savers who do not want to purchase an annuity to take capped or flexible drawdown beyond age 75 will mainly benefit wealthy individuals.

Those with large pension funds would be able to meet a Minimum Income Requirement (MIR), one of the likely stipulations of flexible drawdown, he argues.

But the "vast majority", whose pots are too small to take advantage of the flexibility proposed, will suffer the biggest increase in taxation, says O' Dwyer.

An annuity specialist IFA has also raised concerns about the impact of the Government's proposed changes on investors with smaller pots.

Billy Burrows, partner at Burrows & Cummins, supports many of the paper's plans but warns of a "can of worms of risk and appropriateness" over capped drawdown.

He says the MIR safeguard on flexible drawdown, necessary to stop people from using up their pension too quickly, is absent for the capped option.

The Government today said from April 2011 there should no longer be a deadline by which people "effectively have to annuitise".

Instead, investors will be able to choose between buying an annuity, or opting for either capped or flexible drawdown.

"There is no safeguard in terms of an MIR for people taking capped drawdown," Burrows adds.

"The potential weakness is people will take drawdown past 75 without considering the risks involved and run out of money."

He says setting the annual drawdown limit is another potential problem.

"It has to be high enough to make it attractive but not so high as to encourage people with small pension pots to run out of money."

The consultation 'Removing the requirement to annuitise by age 75' closes on 10 September.