Pensions in an Independent Scotland: Part 2 (plus a word on Inheritance Tax)

In February we sent a letter to the Scottish Government expressing ideas on some reforms over pensions and inheritance tax. This seems as appropriate a time as any to offer those ideas to a broader forum.

I've been musing over various issues that seem to be ripe for exploitation in the battle over fiscal policy. Specifically I have been considering Inheritance Tax and Private Pensions. I believe that tapping into the correct sentiment in these spheres could consolidate very useful voting demographics for Yes.

Firstly Inheritance Tax. It was a manifesto promise of George Osborne to raise the IH threshold in "this Parliament" but that seems to have been conveniently forgotten about along with many other promises. This has been much to the annoyance of the Home Counties Blue Rinse Brigade – the traditional pack-mules of the Conservative Party election effort. I know this from personal experience as a dear relative of mine is part of that set and the disappointment among the elderly Tory cohorts is manifest.

I would imagine that it would not take an economic colossus to be able to piece together a viable argument for the scrapping of IH on the basis that its collection equals or even exceeds the take. This was found to be the case in Australia and New Zealand. In London and SE England the IH threshold is fearsomely close to so many families but in Scotland it is a far less universal threat. However those of retiral or near-retiral age with personal estates of reasonable value could be induced to look favourably on Yes if their immediate family would be freed from punitive penalties on the event of their own death.

Secondly personal pensions. I would suggest looking at two separate issues in the PP area.

a) International annuity purchase

b) Intergenerational pension funds

Regarding annuities the situation in the UK is currently pretty much stacked against the owner of the pension fund. Unless he received sophisticated advice or has a very high value fund the possibilities of shopping for an annuity outside the UK is very limited if not impossible. The potential returns from annuities purchased in other EU jurisdictions e.g. Luxembourg, are rather higher than those generally available in the UK. Also HMRC regards transfer of a fund outside the UK as some form of betrayal of the state due to the UK tax relief attracted by the fund in the first place. This kind of negates the principal of the Single Market in the first place. Surely if UK annuities were worth purchasing then foreign PP fund holders might seek out their terminal investment on these shores. But no. That is not going to happen any time soon.

My suggestion would be a policy guaranteeing PP fund holders the freedom to purchase an annuity anywhere in the EU. Unfortunately this would not help those already in receipt of their PP but it would be an excellent opportunity to attract those nearing retiral, or frankly at any age below that, to look favourably on Yes.

The idea of an intergenerational pension fund is this. When someone has a PP there is the possibility that his/her spouse can benefit from that fund once the PP holder has died. The new proposal would be that, in any and every case, when the beneficiaries to the PP have all passed away and there is a balance left in the fund then that balance should be transferred tax-free into the pension funds of the offspring of the family. It might be the case that it is a drop in the ocean but it could also be a six figure sum which is a tremendous boost to the PP fund of someone some distance away from pensionable age. Of course we can expect the annuity providers to squeal for all they are worth but it would be some steps towards equitable settlement for the poor PP holder who dies before his/her time. This will attract, in my opinion, the same voting demographics as above.

Wilfully populist some might say but logical reforms to my mind.

I do hope that you will give some consideration to what I have written and I hope that it may assist in fighting the good fight! Equally, I do not want to come across as presumptuous and if these matters or similar are already on the table somewhere then I apologise for going over old ground.

Any and all original ideas stated here are those of the Scottish Economic Analysis Unit and do not knowingly reflect the policies of the Scottish Government or any political party or trade union.