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Our summary and thoughts on the proposed changes. The government has announced proposed changes in the post-retirement rules for pensions. These changes, which are due to come into force from April 2011, affect personal pensions or SIPP arrangements, not final salary schemes, and impact your options for taking income from your pension. The key changes: Annuities - you will no longer be forced to buy an annuity at the age of 75 (currently, at 75 you are forced to buy annuity or enter into an Alternatively Secured Pension which has strict income limits and an onerous 82% tax on cash paid on death). Importantly, money back / guaranteed annuities will be allowed after 75. Drawdown - the two options will be available at whatever age you take your pension after age 55 and additionally will replace existing Drawdown or Alternatively Secured Pension arrangements. On death, remaining funds can be used to provide income for a spouse or dependent or passed to a beneficiary as a lump sum subject to a 55% tax charge. Flexible Drawdown – a new option for those who meet a minimum income requirement (MIR) of £20,000 a year from other sources (the basic state pension, additional state pension, final salary pension and annuity income qualify), will not have any limits on the lifetime withdrawals. You will be able to take money from your fund as and when you want. Capped Drawdown – the only option for those who do not meet the minimum income requirement (MIR) of £20,000 a year from other sources. Allows annual withdrawals between 0% and 100% of the Government Actuary’s Department (GAD) limit, which will broadly equate with what an annuity would pay. The GAD limit will be reviewed every three years before age 75 and every year after age 75.
Tax free cash – the 25% tax free cash option will remain and continue as an option after 75. Un-crystallised funds – On death before age 75, untouched pension funds are paid out free of inheritance tax. After age 75 untouched pension funds are taxed at 55%. Our views: Annuities – the changes will be good news for those calling for the removal of the age 75 threshold. However, annuities give a guaranteed income for life and we continue to believe that they should provide at least part of any pension income. For smaller funds and those who are risk averse, annuities remain the only sensible option. Drawdown pensions remain a higher risk option than an annuity and are not suitable for everyone, however overall the new proposals are a welcome development. Flexible Drawdown – a much improved drawdown option for those with the qualifying income, giving near complete control of your fund, but potentially complex and carry a significant burden of risk. Capped Drawdown – the only drawdown option for those who do not meeting the minimum income requirement (MIR) of £20,000 a year from other sources. Those with larger funds could use a proportion to meet the £20,000 MIR requirement and thus qualify for the more controllable Flexible Drawdown pension for the balance of their fund; those with smaller funds may be more suited to an annuity.
Who is affected: Saving for a pension – or considering saving for a pension – We have always strongly recommended saving for a pension. These changes are positive developments which further strengthen the case and give you a wider range of options with potentially more flexible access to your funds after retirement. Approaching retirement – A careful review is essential, of the options and the timing. You may be well advised to wait for the new choices and also it may take insurance companies some time to fully update their systems to encompass the new options. Given the timing, a full review should consider your funds, your requirements and your attitude to risk, before choosing the best option or mix of options. Already in drawdown – You will be moved to the new Capped Drawdown which allows annual withdrawals between 0% and 100% of the Government Actuary’s Department (GAD) limit – lower than the present 120% of the GAD limit, so potentially reducing your income. Switching to an annuity remains a viable alternative or if you have (or can use funds to buy annuities generating) the minimum income requirement (MIR) of £20,000 a year from other sources, then the new Flexible Drawdown option may be considered. Approaching 75 – The range of options available for under 75s are available to you after you pass 75. Over 75 and already in an Alternatively Secured Pension – the new, more benign, drawdown rules will apply. Not affected – If you have a final salary pension, or have already fully vested you pension funds into an annuity, then these changes have no impact.
These changes and our thoughts will be part of the background to our next round of reviews with clients. If you wish to discuss them or anything else before our next meeting, please call. Please note, this information is based on announcements made in the December 2010 autumn tax updates which may change before becoming law. The information provided does not constitute advice. You should contact us to arrange a financial review should you require any further information. 30/12/2010.
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