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Budget 2010
Emergency Budget 2010
Removing the requirement to buy an Annuity by age 75
Following on from the emergency budget of 22 June, the Coalition Government has produced a document to start the consultation process on removing the requirement to secure income under a money purchase registered pension scheme by age 75. Legislation is expected to establish this change from 6 April 2011.
This legislation will introduce a new tax framework for drawing income on retirement. The principles for this framework are much the same as those applicable to the current tax regime e.g. pensions as a means of providing income for retirement and not as a vehicle for passing on wealth to future generations. However, the new regime will offer pension scheme members more flexibility on drawing their retirement income.
Proposed pension changes
From 6 April 2011 there will be no specific age by which income has to be secured from pension funds e.g. purchase of an annuity. Income withdrawal in a form similar to unsecured pension (USP) will be available beyond age 75 subject to a cap. There is no minimum annual income limit and therefore no requirement for income to be drawn at all.
Further flexibility will allow individuals to draw income in excess of the capped limit provided they are able to demonstrate sufficient income to prevent them from exhausting their savings prematurely and having to rely on the State. This minimum income requirement (see below) will be tested for at the point that the individual wishes to draw income above the capped limit.
Alternatively secured pension (ASP) will no longer exist as from 6 April 2011. The new capped drawdown limits will apply to existing individuals drawing income via ASP as from April 2011.
On death under the new capped and flexible drawdown any remaining funds paid out as a lump sum death benefit will be subject to a tax relief recovery charge (estimated to be in the region of 55%). This recovery charge would appear to apply regardless of the age of the individual at date of death while drawing income under the new flexible USP.
The value protection option (amount crystallised less the instalments paid up to date of death) that exists under lifetime annuity and scheme pension will be extended beyond age 75. It is stated in the proposed rules that in general all death benefits will be subject to the recovery charge therefore presumably it will apply here also.
However, on death before age 75 any lump sum paid in respect of uncrystallised funds will remain tax-free. There is no recovery charge where the remaining funds are used to secure an income for a dependant.
The document confirms that ordinarily inheritance tax (IHT) will not apply in addition to the recovery charge in the event of death. In order to deter the use of pension funds as a way of passing on wealth the recovery charge will be set at an appropriate rate.
Under the proposals the tax free cash entitlement (now referred to as pension commencement lump sums) and trivial commutation lump sums will be available beyond age 75. Therefore, it follows that it will be possible to defer taking benefits until after age 75 under a money purchase arrangement. However the document contains confirmation that a test against the lifetime allowance will still be required at age 75 and tax relief will not be available on new pension contributions beyond this age.
Minimum Income Requirement (MIR)
As mentioned above in order for an individual to access income above the capped level i.e. flexible drawdown, there is a minimum income requirement. The individual must demonstrate that he/she has enough "secure income" to meet this requirement.
Only pension income will be considered to meet this requirement. To be considered as secure, the income must be in payment, guaranteed for life, and include increases to cover cost of living increases.
Therefore both the basic state and state second pensions meet this requirement as well as annuities that increase in line with limited price indexation (LPI) or increase at a fixed rate of 2.5% (say). Pensions from occupational pension schemes will be considered secure provided they increase at least in line with LPI.
As the new flexibility will be available from age 55 then the MIR can be satisfied from this age.
In setting the appropriate level the guiding principle is to avoid the individual having to rely on the State because of the depletion of funds. The Government is seeking views as to whether the level should vary according to age and whether different levels should apply for individuals and couples.
Responsibility will lie with individuals to supply income withdrawal providers with sufficient information. Providers will need to be satisfied that the MIR is met before they release funds in excess of the capped maximum.
Please note that these points are in consultation process and do not form part of any legislative requirement at this stage