Scrapping pensions death tax could be dangerous for pensioners

Annuities have been dealt another blow this week as chancellor George Osborne scrapped the death tax on drawdown, but is the government putting retirements at risk to gain political points?

If you knew about the pensions death tax (and many didn't) then chances are you'd have thought it was unfair.

For those whose pensions were in drawdown who were unfortunate enough to die before spending all their money, a 55% death tax was levied on what's left in the pot before the remaining cash was transferred to a loved one.

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The government thought it was unfair too and vowed, as part of the overhaul of pensions announced in the Budget, to cut the tax in the Autumn Statement.

However, the government has decided to make its announcement early (handily moving the focus away from recent Tory defections) and has shockingly scrapped the tax altogether.

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Drawdown good, annuities bad

The announcement has been confusing. At first we thought it was only those in drawdown who would benefit from the abolition of the tax but the Treasury has since confirmed (but not before shares in annuity companies plummeted) that annuity payments from 'value protected annuities' would also benefit from the tax cut.

It took days for the government to get its act together and put out the right guidance on who will or who won't benefit from the abolition of the death tax but in a way it doesn't matter because the public only sees one angle: annuities are bad and drawdown is good.

I'm no fan of insurance companies and many have been proven to make their living ripping off consumers but it isn't right or sensible to assume that annuities are wrong for everyone. The point is that without proper financial advice, drawdown can be a dangerous tool.

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While it allows the flexibility to change pension income depending on circumstance, it also allows people to plunder their pension savings and leave themselves in penury in retirement. Just as bad, it could leave people paralysed by fear of taking too much income that means they take too little and live in penury, dying with a big fat pot of money that they could have used.

Drawdown is a great way to pay for retirement but only in the right hands – for many the guaranteed income offered by annuities is still the best option but the government's messaging is making it very difficult for retirees to see the benefits.

Read more:

What happens to your money after you die?

Pension inheritance tax to finally be axed

Pensioners pay £111,400 tax in retirement: what can you do?