It will be interesting to see if either of the major changes announced in Chancellor Alistair Darling’s Pre-Budget Statement are modified in the real thing (remember the actual Budget doesn’t happen until next March!) in the light of the criticisms that that have already been levelled at them.

However, given the Government’s track record in this area, one proposal that is extremely unlikely to change is that to effectively tax any surplus funds left in your pension fund when you die on a basis that David Seaton, director of consultancy at Rowanmoor Pensions, says means ‘that under these rules it is not tax efficient to die leaving any pension fund after age 75.’

What Investment readers will be familiar with the saga of the Government’s pensions simplification legislation which, after a promising start, has been significantly amended over the past couple of years, and generally not for the better.

Pension prejudices

This should not come as a surprise. Recent Government initiatives on pensions, though no doubt grounded in good intentions, have been blighted by three prejudices that still colour New Labour’s thinking on the subject: the fear that if pensioners are allowed to control their invested fund in retirement they will take too much income, run out of money and be dependent on the state; the belief that, in return for a grudging acceptance that tax relief has to be offered on pension contributions to encourage people to save, there should be a tax charge to claw this back at the end of the process; and, because of this, a desire to limit, and probably do away with, the tax-free lump sum.

This latter point is particularly interesting. The tax-free lump sum, which forms part of many company and most personal pension schemes, is a historical curiosity that has been the target of Government ire for decades.

When the Conservative Government introduced their personal pension rules in 1987, the maximum tax-free lump sum was reduced from 33 per cent of your pension fund to 25 per cent.

This was partly due to a desire to ensure that more was put towards provision of retirement income, but also because there were fears that people were likely to ‘abuse’ these tax-efficient savings pots by using them to do other things, like paying off their mortgages or taking the holiday of a lifetime when they retired.

Why is there a tax-free lump sum at all? I have heard it suggested that the reason a tax-free lump sum element was included when the first national pension scheme was introduced by David Lloyd George (as Chancellor) in 1909 was to enable civil servants who had spent their whole careers in India (and, no doubt other far-flung outposts of the Empire) to buy somewhere to live when they retired back to the Old Country, which is rather ironic when you consider the objections that were raised a few years ago to the popularity of pension mortgages.

However, on consulting Steve Bee, head of pensions strategy at Scottish Life and fount of all knowledge on such matters, it would appear that the origins of the tax-free lump sum are somewhat more complex.

He points out that the first contributory pension scheme was created by Treasury Warrant in 1712 for London-based customs and excise officers. However, although the excise men were paying into their own scheme, it took only 13 years before it had to be recued by an injection of public funds (does this sound familiar?).

Going public

During the course of the 18th and early 19th centuries, the scheme was gradually extended to other groups of public servants, initially on a self-funding basis, although this ceased in 1810 under the financial strains of the Napoleonic Wars, finally being extended to the whole of the civil service in 1834.

The lump sum element, however, was only introduced with the 1909 Pensions Act, again initially as an additional retirement benefit for civil servants.

What is certain is that a key attraction of pension schemes is regarded with suspicion by policymakers who regard it as an undeserved tax break.