End To The Requirement To Annuitise By Age 75

As part of the pension shakeup by the new coalition government, one of the more welcomed changes is the end to the requirement to buy an annuity by age 75. This proposal is part of the Finance Bill and it is planned to come into effect from April 2011. The new legislation will affect anyone who is now considering retirement or is currently drawing an income from their pension through an Unsecured Pension (USP) or Alternatively Secured Pension (ASP).

Key changes

To outline how this will affect retirement plans, we have summarised the key changes and our initial understanding of these rules;

• You can now defer taking the benefits from a Defined Contribution pension scheme indefinitely; you no longer have to do this by the age of 75.
• A new single product, which will be known as a 'Capped Drawdown', will replace the current Unsecured Pensions (USP) and Alternatively Secured Pensions (ASP). These are products that allow you to draw money out of your pension without arranging an annuity, often referred to as 'drawdown' options. Capped Drawdown will be available from age 55.
• You will be able to choose to annuitise, take capped drawdown or flexible drawdown for different parts of your pension. You can also switch into an annuity at any stage if you choose.
• There will be withdrawal limits on Capped Drawdown which will be set at 100% of GAD rate. (GAD rates or tables determine how much income can be drawn based on the size of a pension fund and your age, this ensures the fund is not drained too quickly). GAD rates will be reviewed every three years up until the age of 75 and every year thereafter.
• For those who can meet the proposed Minimum Income Requirement (MIR) of £20,000, unlimited amounts can be drawn from pension pots - this will be known as flexible drawdown. This income will be subject to income tax.
• The new withdrawal limits for Capped Drawdown will apply from 6^th April 2011. For current holders of USP and ASP the new limits and review periods will apply from the next review date.
• The age 75 restriction for certain lumps has been removed. This relates to wind up lump sums, trivial commutation and serious ill health lump sums paid on death (including annuity and pension protection lump sums).
• The tax free cash calculation is not affected, you are still able to take 25% from your pension from the age of 55 but will now be available after age 75 (previously you were required to take your lump sum before age 75).
• There are some changes to taxation. All lump sum death benefits paid from vested funds will be subject to a 55% tax charge.  This is an improvement of the current situation where death occurs after age 75 but an increase from 35% where death is before age 75. Lump sums paid from unvested funds, where the member dies after 75, will also be taxed at 55%; if the member dies prior to 75 no tax will be charged on unvested funds.
• This means from 6^th April 2011, Inheritance Tax will not apply to drawdown pension funds, including on death after the age of 75. The current anti-avoidance rules will be removed.
• Many of the new rules allow product providers more flexibility however they are not mandatory, this means that some providers may not choose to offer them all.

Action

It is important to seek professional advice regarding the change in pension legislation and how they may affect you personally. For more information or to arrange an appointment with one of our consultants call 0800 294 7199 or get in touch online.

The information in this update is based on our understanding of current pension legislation, which is subject to change.  Please seek advice from a professional adviser before making any changes to your pension planning.