Altmann brands 55% drawdown charge an attack on middle classes

Independent pensions consultant Ros Altmann has branded the proposed 55% tax charge on death benefits an attack on the middle classes.

Under current rules, those still in drawdown pay a 35% charge at death if they are under 77 years old and 82% if they are older. Under proposed reforms to compulsory annuitisation these will be replaced by a flat 55% charge.

Altmann (pictured) said the new rate would hit middle income earners who planned to extend drawdown for just a few years. ‘This will hit the middle classes hardest,’ she said.

‘Those who can [only] afford to spend a couple of years in drawdown to grow their pension pot are being penalised while those who can afford not to touch their pension at all are getting free life assurance,' she said.

Savers who do not access their pension savings at all will be able to pass them on at death without incurring a 55% charge.

Steve Patterson, managing director of retirement advice specialist Intelligent Pensions, argued a 55% charge on funds which would pay tax at the basic rate as income would be a ‘major mistake’. 

‘The government is in danger of shooting itself in the foot if this proposal goes ahead,’ said Patterson.

‘Applying a 55% tax charge on money that might only have suffered basic rate tax, or even less, when paid as pension income, will not encourage people to save for their retirement.’

Patterson has written to the Treasury asking tax to be charged according to a ‘notional slice’ of unused annuity income. The tax rate applied to unused drawn-down funds should be charged as if it applied to a level annuity, using the GAD table rate, he said.

‘The income tax charge would then be proportionate to the tax that would have been collected on a continuing pension, taking account of the tax bands and allowances available to the deceased plan holder,’ said Patterson.