14 January 2011
The Treasury has issued further details of the changes to pension regulations that will come into force following the publication of the 2011 Finance Bill in April of next year. We have summarised a number of the key changes, below.
The previously announced changes to tax relief, the reduction in the annual and lifetime allowances and the introduction of carry forward (see UHY Financial Planning Update December 2010) were confirmed.
New annuity rules
Currently you are able to postpone drawing your pension until age 75. From April 2011 benefits from defined contribution (money purchase) pension schemes can be deferred indefinitely.
If you choose not to draw your pension, on death the whole fund could pass to your next of kin as a tax free lump sum providing you did not have pensions valued at more than your lifetime allowance.
If you vest your pension you are able to draw up to 25% of the fund as your pension commencement lump sum; this is usually referred to as your tax free cash entitlement.
Thereafter you can use your remaining pension fund either to purchase an annuity or to establish a “capped” drawdown plan. The maximum income from such a drawdown plan is determined by the Government Actuaries Department (GAD). This income will be broadly in line with the income that you would otherwise have received had you used your pension fund to purchase a single life annuity.
However, there are exceptions…
If you enjoy a secure retirement income of more than £20,000 – the Minimum Income Requirement (MIR) - there are no limits on the level of income you can draw from your pension fund. If you draw more than is available under “capped drawdown” yours would be referred to as a “flexible drawdown” plan.
In this context a secure retirement income will comprise income from state pensions, pension annuities and scheme pensions.
Please note that if you opt for this flexible drawdown option then tax relief will no longer be available for further pension contributions. In addition, it will not be possible for you to be an active member of a defined benefit pension scheme.
Drawdown plans will be reviewed at least every three years (previously at least every five years) until age 75. Thereafter they will be reviewed annually.
Death benefits
In the event of death in drawdown then any unused fund can pass to your spouse/ a dependent and be used to provide a drawdown income or to purchase an annuity. Alternatively, the fund could be taken as a cash sum less a 55% tax charge. Whilst this is significantly higher than the current 35% tax charge levied on death before age 75, it represents a substantial improvement on the current situation for those over 75 who can currently suffer an 82% tax charge on death.
A number of other very significant changes have been announced in this consultation paper that could have a major impact on both your retirement and estate planning.
If you would like to discuss how these changes could affect you then please contact Peter Miller of UHY Financial Planning at p.miller@uhy-uk.com or on 020 7216 4668.
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