Among the announcements that followed the
recent
General Election, the Coalition Government confirmed that it intended to
end
compulsory annuitisation at age 75.
Interim measures were introduced at the Emergency Budget to ensure that anyone reaching age 75 from the 22 June 2010 was not forced to choose between Alternatively Secured Pension (ASP) and annuitisation. The Government has now confirmed its longer-term plans in a HM Treasury consultation. The intention is to introduce the changes from 6 April 2011. The key proposals are:
- There will not be a formal requirement to
take benefits
from a pension scheme at any age, although lump sum death benefits paid
from
any funds where benefits have not been taken by age 75 will be subject
to tax
charges.
- ASP will be abolished and individuals
currently in ASP
will fall into the new regime, but only from 6 April 2011. Unsecured
Pension
(USP) will be split into:
- “capped drawdown” – this will be broadly
similar to USP
as it stands but will not necessarily have the same maximum income
limit, and
- “flexible drawdown” – individuals will be able to draw unlimited amounts from their pension scheme subject to being able to demonstrate that they have satisfied the Minimum Income Requirement (MIR). Lump sums taken under flexible drawdown will be taxable at the individual’s marginal rate of income tax.
- A uniform tax charge of 55% will be applied
to lump sum
death benefits paid from pensions in drawdown, and also to benefits that
have
not been put into drawdown where an individual is over the age of 75.
This will replace the 35% tax charge currently applied to USP lump sum
death
benefits, and the (up to) 82% tax charge applied to ASP.
Both the capped and flexible drawdown options will be available before and after age 75 and clients will be able to take pension commencement lump sums after age 75.
There are no plans to make any further changes that will apply before 6 April 2011, for those currently in USP or ASP. This means lump sum death benefits will be taxed at 35% in respect of a client who dies in USP before 6 April 2011, but if they die after 5 April 2011 the tax charge will be 55%. In ASP the same principle applies, except that the tax charge can currently be up to 82%, whereas lump sum death benefits would only face a tax charge of 55% on death after 5 April 2011.
The MIR will involve an individual demonstrating a sufficient level of secure income which must:
- Be in payment – i.e. it is not an
entitlement to future
benefits,
- Be guaranteed for life,
- Take into consideration expectations of
future cost of
living.
It is anticipated that an individual’s state pension and state second pension will count towards the MIR. It has also been suggested that scheme pensions in payment from occupational schemes and lifetime annuities that are increasing by at least Limited Price Indexation will qualify as MIR. There is no suggestion that income from sources other than pension schemes will count towards the MIR. The exact level of MIR is not set out in the consultation although will be set at a level to protect the Government from the risk of an individual falling back on the state. This will no doubt be one of the main points of debate.
