Hot on the heels of July's announcement of the end of compulsory annuitisation at age 75 comes another major change to pension regulation.

The Treasury announced yesterday it is to cut the annual allowance for pension saving from £255,000 to £50,000 from next April.

The change will affect 100,000 pension savers, 80 per cent of which have incomes above £100,000, according to the Treasury. Pension savings above this level will be subject to a 55 per cent tax charge. Individuals paying 50 per cent tax will be able to claim relief at the full marginal rate.

Individuals will be able to offset unused parts of the allowance over a three year period to allow for one-off spikes in contributions over the £50,000 limit.

The lifetime allowance will be cut from £1.8m to £1.5m in April 2012. The Treasury will consult later this year about measures to help those who are close to and may breach the new limit.

For defined benefit schemes, increases in benefits will be valued at a factor of 16 compared to the current factor of 10. The increase is less than many had expected.

The new structure was put to consultation in July following widespread criticism of the previous administration’s proposal, the High Income Tax Relief Charge, which involved an earnings test, an age-related method of valuing final salary and other defined benefit pensions, and a complex tapering of tax relief for earnings between £150,000 and £180,000.

The changes will not affect the vast majority of savers. A financial planning rule of thumb is to save 12% of income per annum to ensure lifetime financial security. With the ISA allowance of £10,200 per annum and a pension allowance of £50,000 per annum, an individual would have to be earning in excess of £500,000 pa before he or she would be unable to direct all savings into these two tax-privileged savings vehicles.

The reduction in the lifetime allowance is something that needs to be monitored closely, especially for those approaching this figure, or indeed already in excess of £1.5 million.

One moor esteem on the agenda for the next round of annual reviews!

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.