New pension annuity rules
A series of pension announcements have been made today, as part of the consultation process for the Finance Bill 2011.
Central to these proposals is removing the effective requirement to annuitise by age 75.
This had already been announced earlier in the year, with an interim measure taken to increase the maximum annuity purchase age from age 75 to 77. The consultation paper published this morning confirms the details of these new rules.
Legislation will be introduced in the Finance Bill 2011 to remove the current rules that create an obligation for members of registered pension schemes to secure an income, usually by purchasing an annuity with their pension fund, by the time they reach their 75th birthday.
These new rules will come into force on 6th April 2011, assuming a smooth introduction through Parliament.
To support this removal of the age 75 rule, a series of other changes are being made to pensions in respect of tax treatment and the rules applying to income drawdown (unsecured pension) arrangements.
One of the most radical changes to income drawdown rules is the removal of the income limit on withdrawals each year, as long as a minimum lifetime pension income of £20,000 per annum has been secured.
The tax rate on death benefits from an unsecured pension will become 55% for deaths on or after 6th April 2011. For those in unsecured pension and under 75 years old, the tax rate on lump sum death benefits is currently 35%.
There will also no longer be a minimum income limit for unsecured pension from age 75. Currently, when using an Alternatively Secured Pension (ASP) from age 75, the minimum income level is 55% of an amount calculated by the Government Actuaries Department (GAD). The maximum limit of 90% is also being effectively removed.
There are several issues to consider, even at this early stage.
Unlimited access to pension funds in an unsecured pension once a minimum income level of £20,000 has been secured sounds great in practice, but it will be a taxable income. With the highest rate of income tax currently at 50%, this is likely to restrict the annual amount that people in this fortunate position will be willing to extract from their pension funds.
The flexibility to defer annuity purchase past age 75 (and now past age 77) is a welcome move, although for the overwhelming majority of people in retirement, the cost of deferring annuity purchase past age 75 will be excessive. This is due to mortality drag; the negative impact of delaying annuity purchase.
We will be digesting these new rules today and look forward to bringing you a more detailed briefing note in due course.
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