Retirees face inflation, income and inheritance ‘triple whammy’

The UK’s over-75 population is being hit by a financial ‘triple whammy’ as a result of heavy-handed government pension policy and the high cost of basic necessities such as food and heating, according to Alliance Trust, a leading pension provider.

Inflation

The rate of inflation facing the UK’s over-75s is 40% higher than headline inflation (4.2% compared to headline inflation of 3.0%), according to research this week from the Alliance Trust Research Centre. Despite a 30% surge in gas and electricity prices over the past 12 months, the Chancellor announced last month that this year’s Winter Fuel Payment is to remain unchanged. Food prices, another area which has a disproportionate impact on the cost of living for over-75s, are rising at a rate of close to 5%.

Income

Pensioners who wish to continue to draw an income from their pension fund while leaving it invested face a 22% fall in the level of income they can draw at age 75, following December’s Pre-Budget Report.

Drawdown income for those under 75 can be up to 120% of a single life annuity based on the Government Actuary’s Department (GAD) annuity rates, and this must be reviewed every five years. However, those who choose to continue to draw income after their 75th birthday, by taking an Alternatively Secured Pension, will be able to draw an income of no more than 90% of a single life annuity, and this is based on age 75 regardless of their actual age. Worse still, this level must then be reviewed annually.

Based on a £100,000 fund and a gilt yield of 4.5%, a 74 year old man could draw down up to £11,520 per year and a 74 year old woman could draw down up to £10,200. But at 75, the maximum annual income would plummet to £9,000 and £8,010 respectively, representing a reduction of a little over 20%.

Inheritance

Having introduced the concept of an Alternatively Secured Pension in April 2006, enabling retirees to leave their pension fund invested and transfer any remaining funds to family members on death, the Chancellor has announced a 70% tax charge on any remaining funds. Coupled with inheritance tax of 40% charged on the remaining sum, this would amount to a tax of 82%, largely wiping out any inheritance benefits.

Hyman Wolanski, Head of Pensions at Alliance Trust, comments: “The over-75s might reasonably ask themselves what the Government has got against them. It costs the over-75s more than any other group to get by, but the Government has not increased their Winter Fuel Payment this year, it also allows them to take less income from their pension fund, and if they die with any money left in their pension fund they now face a massive tax grab of up to 82%. We urge the Government to think again about the financial needs and wishes of the most vulnerable group in society and the negative impact this will have on those thinking about saving through pensions.”