The Draft Finance Bill 2011 has been published today and it contains significant changes to how income will be taken from pension funds in the future.
The new legislation will come into effect from 6th April 2011 and includes changes to:
- Compulsory annuitisation and ASP (Alternatively Secured Pension)
- Tax free lump sums
- Maximum and minimum income limits
- How death benefits are paid and the tax on such payments
The new legislation will primarily affect those people already in income drawdown or who are approaching retirement and considering their options.
Annuities and ASP
The requirement to secure an income by age 75, which is generally done in the form of an Annuity, will be scrapped.
This will be replaced by lifetime capped income drawdown.
Tax free lump sums
Currently these must be taken before the age of 75, after April 2011 this requirement will be abolished allowing people to delay the date at which they take their tax free lump sum.
Some commentators had suggested that the government would remove the tax free status of such lump sums; this has not been included in the draft legislation.
Capped income drawdown will allow withdrawals from a pension of between zero and 100% of the basis amount, which is set at broadly what a single life Annuity would pay.
Current limits are 120% for those aged under 75 and 90% for those who are older than 75. Therefore the new limits may see a reduction in income for people aged under 75 who are currently withdrawing the maximum possible.
The requirement to take a minimum income, which is currently set at a rate of 50% of the basis amount, after the age of 75 will be scrapped.
A new flexible drawdown option will also be introduced allowing withdrawals above the capped income drawdown limit for those who have guaranteed lifetime income of at least £20,000 per annum. The £20,000 figure has been introduced to stop people drawing all their money from pension funds and then relying on the State.
The new legislation will not stop the purchase of an Annuity, indeed this is likely to still be a very popular option; however it does open up other opportunities for those people with income above the guaranteed lifetime income level.
The capped income drawdown limit will be reviewed every three years before age 75 and yearly after 75.
Taxation on death
Death after benefits are taken will now incur a blanket 55% tax charge, no further Inheritance Tax will be payable.
Currently death before age 75 attracts a 35% tax charge, which rises significantly at over 75 years of age to an effective rate of 82%.
When do the changes take effect?
The changes will take effect for all new drawdown pension arrangements made on or after 6th April 2011.
For those already in income drawdown the changes will be staggered and will be dependent on your age and the next review date for your existing income drawdown plan.
Winners and losers
As with any change to legislation there are those who will be better off and those who are affected negatively.
The main winners will be those with large pension funds and alternative sources of income in excess of £20,000. In addition, those people who were previously put off investing in a pension because of the compulsory Annuitisation will be pleased with the announcement.
There is a tax benefit to those who die after age 75 as the tax rate will fall to 55% from 82%.
Finally, those people who do not want to be forced into taking their tax free lump sum by 75 will no longer be forced to do so.
The news is not so good for people who have taken benefits and die before age 75 as the rate of tax payable will rise from 35% to 55%.