There is much written about why individuals need to be incentivised to save for retirement and the importance of tax relief on contributions in achieving that goal.

However, with the ability for individuals in a defined contribution arrangement to access their full pension fund from April 2015 it will now be just as important to provide a stimulus, preferably a tax one, to encourage individuals to retain monies within their pension.

In AMPS response to the Treasury's consultation on 'Freedom and choice in pensions' a high proportion of the content focussed on the new tax framework and one key area was on the proposal to reduce the special lump sum death benefit charge of which, unsurprisingly, we are supportive.

The pension tax regime has the capacity to drive individuals' behaviours and the advice they receive. With the new pension income flexibility there is the danger that an unfavourable pension tax regime may drive behaviours and advice towards rapid withdrawal of income.

The prudent approach to retirement income provision via drawdown would be to draw a sustainable amount of income so as not to deplete the fund and avoid falling back on the State in later years. However the consequence of taking that prudent approach is the likelihood of significant funds remaining on death. As has been recognised within the consultation process the 55% tax charge may be too high and drive the behaviour of depleting pension funds rapidly in order to avoid that charge and potentially seek to also mitigate IHT by gifting excess income or placing it in other alternative IHT exempt trusts or investments.

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Whilst various alternative proposals to the 55% special lump sum death benefit tax charge have been mooted, such as a direct replacement with a lower fixed tax rate, a rate depending on fund size, being assessed for IHT or subject to income tax each will have its pros and cons. AMPS however suggest consideration should be given to introducing the option that whilst lump sum death benefit payments may be subject to a tax charge if paid out of the registered pension scheme environment, if paid to a beneficiary's own registered pension scheme it would tax free.

This could materially drive behaviours towards prudently retaining pension funds rather than quick extraction with a view to passing on funds via alternative IHT mitigation methods.
The time to implement the proposed changes is very tight so we should not have to wait long for the draft legislation. It is important for advisers to keep abreast of what is happening and to start to consider what the impact and opportunities the changes will provide for their clients.
In a pub I have been known to frequent there is a notice above the front door which states " Everyone who passes through this door brings joy, some on arrival but most on departure' . I am sure that with regard to the 55% tax charge it will be the latter.