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UK Government To Tighten Tax Screws On Pension Income

by Jason Gorringe, Tax-News.com, London

23 December 2003


An Inland Revenue consultation paper released last week has revealed plans to make it harder for taxpayers who pass on pension funds in lump sums to their heirs to enjoy a tax advantage.

According to the proposals put forward in the paper, a series of new rules could mean that taxpayers face a variety of different rates on pensions. Lump sums paid by pension schemes using ‘open-annuity’ plans, which allow investors to draw an income and pass surplus funds on to their heirs, could pay over 40%, according to tax experts.

According to the Revenue, the tax rate is expected to apply from April 2005, and will affect payments made where the investor was over 75 when they died.

Many observers view the proposals as the government’s way of forcing pensioners to turn capital into income when they retire, in order to prevent pensions from being used as tax saving vehicles.

“What they're trying to stop is a capital pay-out triggered by death,” Ken Wrench, chief executive of Gibraltar-based London and Colonial, told the Financial Times. He added that his firm intends to “re-design” its open-annuity package in response.


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