The draft legislation also makes changes to unsecured pension (income drawdown) and alternatively secured pension, effectively removing the requirement to annuitise by age 75. In the short term, this is likely to affect those approaching, or already in, retirement and their dependants.
How might this affect you?
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• If you have not yet reached age 75, but will do in the next couple of years, the Government has introduced temporary rules that apply to you until the new legislation is passed.
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• If you are already over age 75, and in Alternatively Secured Pension (ASP), the temporary rules do not affect you, but the changes taking place on 6 April 2011 will.
Temporary Rules – for those
under age 75
If you are under 75 you:
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• must still take your pension commencement lump sum before you reach age 75;
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• must also either take an annuity, or go into unsecured pension, before this date; and
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• no longer have the option to go into ASP
on reaching 75.
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If you are already in unsecured pension, once you reach your 75th birthday you are now allowed to remain in it. This extension of the rules will apply until age 77, which will allow the Government enough time to introduce the changes to legislation.
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The normal rules of unsecured pension still apply in terms of death benefits and five yearly reviews.
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It may be difficult for unsecured pension providers to offer the flexibility of these new rules, due to computer systems not being designed to offer the product beyond age 75.
Rules from 6 April 2011
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The new legislation will completely abolish the requirement to buy an annuity or go into ASP at age 75, or any age. A drawdown pension will be available throughout retirement, but subject to an annual cap.
This cap:
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• will be set at 100% of an equivalent annuity (currently set at 120%);
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• will be determined every three years up to age 75 (currently every five years); and
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• will be determined annually from age 75 onwards.
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Individuals that can demonstrate a secure pension income of at least £20,000 a year for life will not be subject to a cap. Pension income that can be taken into account is to include scheme pension, lifetime annuities (but not purchased life annuities) and State pension.
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Individuals will have full access to their funds, and any withdrawals will be taxed as pension income. They will, however, be subject to the annual allowance charge on any further contributions they make into a registered pension scheme.
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Most of the rules preventing registered pension schemes from paying lump sum benefits after the member has reached the age of 75 are being removed. This includes taking a pension commencement lump sum.
Death benefits will also be altered. From 6 April 2011 lump sum death benefits:
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• will remain tax free up to the lifetime allowance, where benefits have not been taken and the individual is under the age of 75;
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• will otherwise be taxed at 55%, but without any restriction on age; and
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• will not typically be subject to IHT.
