Time for action is now

If there was a single policy that brought down Mrs Thatcher as prime minister, it was probably the poll tax. It combined two disastrous features; unfairness with a direct impact on people’s pockets. Add to this its blinkered implementation and it paved the way for one of Britain’s most successful politicians, in electoral terms, to be forced out of office.

There are now parallels with the poll tax and the 82pc charge on the residual estate of an individual who used the alternatively secured pension provisions. Granted, we are unlikely to see anyone rioting in the street, but it is equally unfair in its own way and the heavy-handed attempts to “persuade” us of its logic are reminiscent of the poll tax.

For more and more of those now retiring, conventional annuities are no longer the most suitable or attractive way to take a retirement income. But the government, by imposing an effective tax rate of 82pc on unused ASP assets, clearly wants as many retirees as possible to buy an annuity by age 75.

There are several objections to this approach. Firstly, the tax stick is out of all proportion with taxes elsewhere on pensions and estate planning. The size of the tax is clearly intended to enforce a strange desire to limit ASP to a religious minority, something that the government cannot put directly into legislation as it would be illegal.

Ministers such as Ed Balls have talked about monitoring ASP usage for any signs of its abuse, but they have failed to define what an abuse of ASP is. Is it simply when someone without a religious objection to annuities wants to use the government’s own rules on ASP, as they are perfectly entitled to do so?

This draconian tax and the crude attempts to justify it are simply bullying tactics which should be resisted by the life and pensions industry. Unfortunately, there are worrying signs that some pension providers are weakening in the face of the government’s threats and do not allow ASP with their self-invested personal pensions (SIPPs).

According to Hornbuckle Mitchell research, Friends Provident, Scottish Widows and Legal & General do not offer ASP on their SIPPs, while AXA Sun Life could possibly allow it later this year and Scottish Life does not allow it for protected rights.

There is also a trend for ASP to be ignored in comment and debate on pensions and annuities. How can the industry, on behalf of the consumer, get the government to look again at ASP and the 82pc tax on it, if it fails to offer ASP as an option, or to talk about it in public as an alternative to buying an annuity?

The calculation of the total tax bill under ASP is also complex. An individual leaving a fund of £950,000 to a deferred member as a transfer lump sum death benefit would pay an inheritance tax charge at 40pc of £380,000, with an unauthorised payments charge on the balance, plus an unauthorised payments surcharge as the payment is over 25pc of the fund, plus a scheme sanction charge, giving total tax of £779,000, or 82pc of the fund.

No wonder more and more of those using ASP are deciding to leave their estates to charity in the face of such a tax bill – part of which will fall on the recipient. This also shows that retaining control over their pension assets during life, rather than passing on assets at death, is the prime motivation for using ASP.

From a wider perspective, the government’s penal tax on ASP shows that it does not really understand what is now happening in the pensions market. Those using ASP are well-off and will not fall back on the state if they run out of pension assets.

The need for annuity reform is becoming increasingly urgent and clamping down on ASP will not make annuities, or the government, any more popular.

Neil Marsh is managing director of Hornbuckle Mitchell