Scottish Widows has proposed an alternative system for calculating the maximum lifetime pensions lim...
Scottish Widows has proposed an alternative system for calculating the maximum lifetime pensions limit which assesses the annual limit any person can take, and without needing to constantly reassess relevant calculations and the limit.
Rather than setting a maximum lifetime limit of £1.4m, Scottish Widows suggests a maximum annual limit of around three times the National Average Earnings - which is currently around £25,000 - which is then valued each year using the annuity rate calculations introduced for Statutory Money Purchase Illustrations (SMPI) to give a potential total pension fund of £1.7m.
Rather than focus on the amount of a lifetime fund, Iain Naismith, head of marketing and sales, technical at Scottish Widows, says the key starting point should be to establish a simple method of calculations which can be applied to all policies.
Broadly speaking, these SMPI calculations automatically take into account any annuity rate movements as calculations are based on a table of mortality rates and the year an individual is born.>
"The SMPI basis used for valuing the pension changes automatically every year to take account of both changes in interest rates and increasing longevity among pensioners," says Naismith.
"That means that there's no need to review the limit regularly, as there would be with a monetary limit even if it increased automatically in line with earnings. One danger of such reviews is that the basis is changed for political reasons and more consumers are affected by the limit. That's much less likely with our proposal," adds Naismith.
Similarly, Scottish Widows believes the annual transfers limit of £200,000 should instead focus on where the money goes as well as what people can do with the additional capital if they have more than the maximum lifetime limit within their pension fund.
Rather than restricting the amount they can tranfer, Naismith says administration systems will be simpler if controls are placed on large transfers, to ensure money does not end up moving illegally from tax-efficient pension plans to offshore accounts.
Anyone who is lucky enough to raise more than the limit should also be allowed to take the whole of the excess as a lump sum after tax - rather than limiting it to the government's proposed 25%, because it might prevent remaining assets saved over many years from being used elsewhere.
Any funds remaining in what is termed an 'unsecured arrangement' or income drawdown should also be handed back to the beneficiaries or dependents, minus a 35% tax charge, if the person dies before age 75, suggests Scottish Widows.
As it stands, unless something is written to ensure money goes back to the deceased's estate, the money will be seen as a windfall for life offices, whereas current rules for income drawdown see assets fold back into the estate if the person dies before the age of 75.
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