Pensions tax could hit widows

BEREAVED widows and widowers could lose thousands of pounds from pension funds under a new tax plan by Chancellor Gordon Brown.

The move will scrap 30-year-old tax rules which ensure that a surviving partner gets a tax-free lump sum if the husband or wife dies within five years of retirement.

A discussion document prepared by the Treasury and the Inland Revenue wants the payouts taxed at 35% - a staggering 13% more than the basic rate of income tax.

Each year it would net the Treasury £200 million in extra tax and cost 20,000 widows and widowers an average of £9,000 a head.

Most victims would be women because they tend to outlive their husbands. The move was yesterday branded a 'tax on widows' and there were demands for its withdrawal.

Tory Works and Pensions spokesman David Willetts said: 'This nasty little stealth tax will attack people at their most vulnerable - after a bereavement. It is typical of New Labour to bury this sort of thing in the small print and hope no one will notice.'

He was backed by Richard Wilson, incomes policy adviser to Help the Aged, who said: 'We strongly oppose this tax on widows. Older women are poorer than older men, so they're much more likely to suffer poverty.

'It is crazy. The Government is asking people to stay on and work longer - yet now it's telling them they'll tax any lump sum a surviving partner gets if he or she dies early. Labour is trying it on but must not be allowed to get away with it.'

Gordon Lishman, directorgeneral of Age Concern, said: 'Pensioner poverty is at crisis level already - and those most at risk are women who are living on their own.

'Any reforms which could result in bereaved pensioners receiving a lower income in retirement are very worrying.'

An Inland Revenue spokesman stressed: 'This is a consultation document. We have requested responses from people with an interest in the subject and will be reporting to Ministers.'

When The Mail on Sunday contacted the Treasury, it claimed the 35% tax rate on pension lump sums already existed.

Yet Paragraph 5.33 of the consultation paper, Simplifying the Taxation of Pensions, states: 'For scheme members who die after starting to receive benefits from the scheme, the tax rules will allow, up to age 75, limited lump sums, taxable at 35%.' When questioned again later, the Treasury spokesman conceded that the new 35% figure was being considered.

'If this proposal goes ahead,' he said, 'it will be up to people to decide if they join schemes carrying this tax rate.'

Latest figures from the Department for Work and Pensions for 2001-2002 show that the average income from occupational pensions schemes for recently retired couples was £9,776 a year. The figure rises to £10,778 when inflation is taken into account.

Based on death after two and a half years of retirement, the average lump sum would be £26,945, a total annual payment of £538.9million to 20,000 widows and widowers. Tax at 35% would be £188.6 million - or £9,430 a head.

An Inland Revenue working party has spent two years under the Treasury's direction looking at how to simplify pension rules.

Insiders say Treasury officials showed keen interest in the growing trend of widows and widowers to use pension schemes to pass inheritances to their children.

AWhitehall source said: 'This is a money-making wheeze. Brown just wants to collect more money.'

How the grieving would suffer

UNDER the present 'five-year' rules, a widow whose husband dies two years after his retirement date is entitled to a tax-free lump sum equivalent to a further three years' payments - five years minus two. A worker in a company scheme on a salary of £16,500 a year would, on average, receive roughly half the annual salary - £8,250 - as a pension. So a lump sum of three years' payments to his widow would total £24,750.

Under the new proposal, the widow would have 35% tax deducted, reducing the amount she received by £8,662 to £16,088.