The Government has now announced its longer term plans for consultation with regards the scrapping of the requirement to buy an annuity at age 75 and with the possibility of the following changes from 6 April 2011:
- There will not be a formal requirement to take benefits from a pension scheme at any age; although lump sum death benefits paid from any funds where benefits have not been taken by age 75 will be subject to tax charges.
- Alternative Secured Pensions (ASP) will be abolished. If your client is currently in ASP they will move into the new regime from 6 April 2011.
- Unsecured Pension (USP) will be split into:
"capped drawdown" - this will be similar to USP as it stands but will not necessarily have the same maximum income limit, and
"flexible drawdown" - clients may be able to draw unlimited amounts from their pension scheme subject to being able to demonstrate that they have satisfied the Minimum Income Requirement (MIR). Lump sums taken under flexible drawdown will be taxable at the individual's marginal rate of income tax.
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A uniform tax charge of 55% will be applied to lump sum death benefits paid from pensions in drawdown, and also to benefits that have not been put into drawdown where an individual is over the age of 75. This will replace the 35% tax charge currently applied to USP lump sum death benefits, and the (up to) 82% tax charge applied to ASP.
It is proposed that the current rules for people in USP or ASP will remain the same up until 6 April 2011. This means lump sum death benefits will be taxed at 35% in respect of a client who dies in USP before 6 April 2011, but if they die after 5 April 2011 the tax charge will be 55%. In ASP the same principle applies, except that the tax charge can currently be up to 82%, whereas lump sum death benefits would only face a tax charge of 55% on death after 5 April 2011.
Both the capped and flexible drawdown options will be available before and after age 75 and clients will be able to take pension commencement lump sums after age 75.
The MIR will involve having to demonstrate a sufficient level of secure income. This secure income must:
- Be in payment - i.e. it is not an entitlement to future benefits,
- Be guaranteed for life,
- Take into consideration expectations of future cost of living.
It is anticipated that the State pension and State Second pension will count towards the MIR. It has also been suggested that scheme pensions in payment from occupational schemes and lifetime annuities that are increasing by at least Limited Price Indexation will qualify as MIR. There is no suggestion that income from sources other than pension schemes will count towards the MIR.
The exact level of MIR is not set out in the consultation although it will be set at a level to protect the Government from the risk of an individual falling back on the state. This will no doubt be one of the main points of debate.