Stuart Russell delves into legislative changes affecting how retirement income can be taken.
From A-day (6 April 2006), and until recently, legislation required that pension income was ‘secured’ by age 75. This was interpreted as having to buy an annuity by age 75 as the only alternative, alternatively secured pensions was seen as being more of a high net worth solution.
The emergency budget earlier this year announced some welcome changes in the short term and held the promise of future beneficial changes as well. From 22 June 2010, age 75 was replaced by age 77 with the consultation that followed proposing permanent changes from 6 April 2011.
While the change to age 77 seems pretty simple, Her Majesty’s Revenue and Customs (HMRC) has issued a detailed technical guidance document to explain how these interim rules will apply in practice. The highlights are as follows but you should note that these interim rules only affect money purchase benefits (such as SIPP and SSAS).
Members/dependants who had not, by 22 June 2010, secured benefits are generally subject to the current rules except that age 77 has been substituted for age 75. Anyone who reached age 75 prior to 22 June 2010 is not affected. In particular, anyone already in ASP will remain in ASP.
Tax free cash will still only be payable before age 75. At this point all funds must be crystallised and become unsecured pension (USP) funds and there is no change to the current need for a lifetime allowance (LTA) test at this point.
USP calculations carried out after age 75 will be based on age 75 GAD rates. If scheme rules do not allow USP after age 75, the law has been amended to give discretion to scheme trustees and scheme managers to take advantage of these changes.
Post April 2011
Greater personal responsibility, flexibility and continued belief in annuity purchase are at the heart of the government consultation on the proposals from 6 April 2011. Those proposals include the following main points.
There is no requirement to buy an annuity at any age and tax free cash will be allowed at any point after age 55 (for example, the option will no longer be lost at age 75). USP and ASP will be replaced by two new types of drawdown (capped and flexible). These will be available from age 55 onwards but subject to some conditions .
‘Capped drawdown’ is basically the same as USP but will continue beyond age 75 throughout retirement. Income levels, as for current USP, will range from zero up to a capped limit. This limit is subject to discussion but is likely to be below the current level of 120% of the GAD rate.
The alternative, ‘flexible drawdown’, will allow unlimited amounts to be taken, provided the individual can demonstrate that they have already ‘secured’ sufficient pension income (a minimum income requirement (MIR)) to prevent them exhausting their pension savings too quickly.
Details of the proposals for MIR indicate that (i) only pension income can be taken into account. Income from other personal resources will not count for MIR purposes; (ii) ‘Secured’ means in payment, guaranteed for life and with provision for cost of living increases; (iii) State pensions and pensions from occupational schemes with annual minimum guaranteed increases will count (known as ‘Limited Price Indexation’ or LPI). Lifetime annuities increasing annually by at least LPI, the Consumer Prices Index or 2.5% will count. It would appear however that certain pensions secured from personal pensions may not be included; (iv) the level of MIR has yet to be confirmed but we believe that it will vary according to pension age and whether an individual is married (or in a civil partnership) and (v) the individual would need to provide evidence of secured pension income to the pension provider before flexible drawdown would be permitted. ‘Satisfactory evidence’ has yet to be determined.
Any funds not used to provide a dependants’ pension will be taxed on death. This is likely to be at a rate sufficient to recover previous relief given (for example, around 55%). However, as now, on death before age 75 no tax charge will be applied to funds which have not already been used to provide benefits. The government is alert to the fact that pensions could become inheritance accumulation vehicles and they will monitor this and revise (raise!) the tax rate as appropriate.
The LTA test at age 75 will remain and tax relief on contributions will still cease at age 75.
Removal of age 75 as a pivotal decision point and the increased flexibility to take additional funds at will under flexible drawdown are to be welcomed. However, there has to be a concern around the potential complexity that the use of MIR could bring.
There is some concern, or perhaps disappointment, that 75 is still to be used as a cut-off age for tax relief on contributions. However, this should not come as a surprise since HMRC have made it clear via their consultation on ‘Restriction of pensions tax relief’ that the government’s deficit reduction plans are paramount.
Interest rates held
'Transfer volumes to decrease'
‘Call to action for mortgage advisers’
A brief history of bonds