Have pension freedoms broken Britain's social contract?
The pension freedoms have focused on the ability to get your savings out as cash from April. But the changes to death benefits that allow wealthy individuals to pass on their pension are more radical and arguably more damaging to the UK's social contract.
From April, those who die before age 75 will be able to pass their pension on to anyone they like tax-free and those over 75 will be able to pass it on to whomever they choose minus a reduced tax rate. The big changes are that pensions can be left to anyone, not just a spouse or dependent child aged under 23, and the 'death tax' has been reduced from 55% to 45% and will fall further to the beneficiaries rate of income tax.
Why should you care? You're probably not going to have much left in the pot to pass on if you're an average household. But that's exactly the point; it will be the wealthy who will benefit most from the changes to death benefits.
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We all, as taxpayers, pay for the tax relief that the government rewards to those who pay into pensions. Those who are wealthier, paying 40% income tax, already receive the most tax relief because it is aligned to the income tax you pay. The idea is you pay back that relief when you spend your pension, which is taxed as income.
If we're all paying into wealthy people's pensions is it right they're given further benefits and incentives further down the track, beyond retirement?
The 'social contract', as Hargreaves Lansdown pension expert Tom McPhail put it to me, seems to be broken. And I couldn't agree more. While all taxpayers, no matter what they're earning, are expected to fund saving incentives for all pension contributors regardless of wealth, why is it that the wealthy - those who don't need to live off their pension in retirement - are handed another tax break?
The government has distracted us all by enticing everyday people to get their hands on their pension and slipping in another tax break for the well-off through the back door. The people that do raid their pot and draw out large sums of cash will be paying ever larger amounts of income tax, some unwittingly, thus bestowing the taxman with even more of their hard-earned cash while their wealthier neighbours utilise their pension as a new tax planning tool.
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