Paul Leatherbarrow, Liverpool
On 9 December 2010, the Treasury released the draft of the proposed changes to pension legislation from 6th April 2011.
The new rules will revolutionise the way pension benefits are taken, making retirement more flexible. (and is subject to change - in particular it is subject to actual legislation being laid. This guide is not advice.)
So what is changing?
• No restriction of pension tax relief for additional rate tax payers
• The lifetime allowance reduced from £1,800,000 to £1,500,000
• The annual allowance is reduced from £255,000 to £50,000
• It is possible to carry forward unused annual allowance for up to three years
• No longer be possible to exceed the annual allowance tax efficiently in the year pension benefits are crystallised other than by using the new carry forward reliefs Additional changes
• The requirement to annuitise by 77 (previously 75) removed .Whilst the majority of retirees will still want a secure income at the point of retirement, this change provides an alternative option for investors who would prefer to have greater control and flexibility over how and when their pension income is paid. The rules are positive news for pensions and make pension saving much more attractive.
• Maximum income in drawdown will be 100% GAD regardless of age
• If a client certifies they have a remaining guaranteed lifetime pension income of at least £20,00 per annum (including state pension benefits)there will be no cap on pension withdrawals
• Pension commencement lump sum can be taken at any age after normal retirement age and no longer has to be taken by age 75
• The link to life time allowance for trivial commutation is broken, so those with total pensions of no more than 18,000 will still be able to treat them as trivial
• The link to lifetime allowance for protected tax free cash is also broken removing the worry that a client with protected tax free cash would find the protected amount was reduced on 6/4/2012
• 55% total tax on lump sum death benefits regardless of age
• Provided the pension scheme trustees have discretion on where to pay the benefits, there will be no IHT on pension lump sum death benefits regardless of whether or not the pensioner deliberately increased the value of his estate by not taking benefits
• The annual allowance charge will now be linked to individuals marginal tax rate rather than a flat 40% The treasury has stated it will look at EFRBS and EBT with regard to tightening up legislation on the rules, which currently enable the schemes to avoid income tax and NI on what are basically salary and bonus payments. With an intention to back date to Dec 2010 What the new legislation means for You:
• It will now be possible to leave your pension fund untouched for as long as you like. If you still have enough income from employment or other assets your pension can continue to grow free of UK income and capital gains tax. However it is worth bearing in mind that the death benefits change once you reach age 75 if you have not taken benefits at this point
• Retirees can use income drawdown indefinitely. Investors will be able to use income drawdown or take no income at all from their pension for as long as they want. However you must be aware that tax charges on any lump sum death payments will prevent this option being used to avoid inheritance tax .
• Alternatively Secured Pensions, which had a number of restrictions and limited death benefits, will be scrapped.
• If at age 75 you decide to remain in drawdown you can still benefit from the same income rules and death benefits as pre 75. It is also now possible to defer drawing any income until after age 75. 3
• Flexible drawdown has been introduced. This is a new drawdown option which allows some investors to take as much income as they want from their fund in retirement. It will be available to people over the age of 55 who can prove they already have a secure pension income of £20,000 a year when they first go into flexible drawdown. The secure income can be made up of state pension or from a pension scheme and does not need to be inflation proofed. Investment income does not count. It will not be possible to make any further pension contributions to any pension scheme either in the year you move into flexible drawdown or any year thereafter. flexible drawdown will allow you to draw as much of your pension as you need, when you need it (subject to income tax ). It will also be possible to use part of your pension to buy an annuity to secure the £20,000 and then move the rest of your pension to flexible drawdown .
• Current drawdown will in future be referred to as capped drawdown. The maximum income will be broadly equivalent to the income available from a single life, level annuity. This is a slight reduction on the current maximum income allowed. There will be no minimum income, even after age 75. The maximum amount will be reviewed every 3 years rather than every 5 years. Reviews that take place after age 75 will be carried out annually. Unlike the current ASP, the income available after age 75 will be based on your actual age rather than defaulting to age 75.This is very similar to the current drawdown system. The main changes will be that the maximum income available under age 75 will be a little lower than at present and the maximum income over age 75 will be a little higher. There will no longer be a requirement to take an income after age 75. Under ASP it is always assumed you are 75 when calculating your income limits. Under capped drawdown your actual age will be used, meaning the percentage of your pension that can be drawn should increase as you get older, rather than remaining static.
• Changes to death benefits and tax charges. If you die whilst your pension fund is in either form of drawdown, or after the age of 75, all your remaining fund can be used to provide a taxable income for a spouse or dependant. Alternatively it can be passed on to a beneficiary of your choice as a lump sum, subject to a 55% tax charge (or nil charge if paid to a charity). No tax is welcomed with open arms, but a 55% tax charge is a vast improvement on previous tax charges of up to 82% on lump sums paid after age 75.5
• For investors in drawdown before age 75, the tax charge is now higher if you want to pass your remaining fund as a lump sum in the event of your death, however this is more than balanced out by the fact the tax charge is significantly reduced for passing your fund on after age 75. It is also important to note that the 55% tax charge will be applied on death after age 75 even if you have not purchased an annuity or moved into drawdown. Rules for those already in drawdown. Individuals who are already in drawdown will not be immediately subject to the new requirements however transitional rules will apply. They will need to adopt the new rules either at their next review or when they transfer to another drawdown plan.Investors already in drawdown can benefit from the new rules and can continue in drawdown past age 75. However it is likely that when the new rules are adapted at their next review, they will see a reduction in the maximum income they can take. 25% tax free cash - The ability for most people to take up to a quarter of the pension fund as tax free cash will still be available when the individual sets up an annuity or goes into income drawdown, even if they take no income.
• There had been fears that the government may reduce or remove the ability to take a quarter of your pension tax free. Fortunately there has actually been little change to the tax free lump sum, with the exception that you can now take it after age 75 if you so choose. Wealthier clients will be happier with the relaxation of restrictions on how they can take benefits from their pensions and pass on pension assets to their family members Some may wish to take the opportunity of having their company make pension contributions of over £50,000 to members of their family on low taxable incomes and for there to be little or perhaps even no tax penalty for doing so
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