Government amendments to the Finance Bill 2007 could encourage more people to make use of the annuity Open Market Option at retirement, says Standard Life.
The changes would re-introduce a common pre-A-Day practice for defined contribution schemes. This would allow providers to pay out the tax-free cash as soon as an individual retires so they have income to bridge the gap between their salary stopping and their pension starting.
Since A-Day, a pension commencement lump sum (PCLS) or tax-free cash cannot be paid to a member before the scheme either starts pension payments or passes the funds onto the pension provider chosen through the OMO. This is because it would be treated as an unauthorised payment and attract a penal tax charge.
However, Andrew Tully, marketing technical manager at Standard Life, says the prospect of having no income during this time deters retirees from exercising the OMO, which is the direct opposite of what the Government wants to happen.
As a result, the Government has suggested allowing schemes to pay tax-free cash from between six months before to one year after the purchase of the annuity. This will give schemes more freedom to pay tax free cash immediately even if the member is buying an annuity elsewhere.
In addition, Standard Life says if the changes do make it through to when the Bill receives Royal Assent in July, the amendments will be backdated to 6 April 2006, A-Day.
Tully adds: “This is a sensible change which may mean more people use the OMO, which is what the Government wants to encourage. Although schemes probably won't want to introduce this until the Finance Bill is given Royal Assent.”
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