We have already highlighted the main changes to pension legislation published by the Government last week in the draft Finance Bill, however we thought we would take a closer look at who the winners and losers might be from the changes.
In summary the big winners will be those with large pension funds or a guaranteed income in excess of £20,000 per year. The legislation will also be popular with those people who do not, for whatever reasons, want to buy an Annuity as the requirement to do so has been abolished.
Beneficiaries or the estate of those who die after age 75 will also benefit. At present the tax charge on death in an ASP contract equates to 82%, the new legislation reduces this to 55%. However for those who die before age 75 in income drawdown the new tax charge of 55% represents an increase from the current rate of 35%.
Those people who have a guaranteed income in excess of £20,000 per year could also be winners. They will have increased flexibility to withdraw more than the allowable amount under capped income drawdown. Any additional income taken will be subject to tax at their highest marginal rate but will be viewed by many as an improvement on the current situation.
Those people already in income drawdown and taking the maximum income possible are likely to see a reduction in their income at the next review.
The new legislation means the maximum which can be drawn down will fall from 120% of the basis amount (broadly equivalent to a single life Annuity) to 100%, combine this with lower gilt yields and people already in income drawdown could see their income fall at their next review. The effect of this of course could see pension funds rising because less income is available, however a lower income may still come as a shock to some.
The legislation does nothing to promote the Open Market Option (Open Market Option) available which allows an Annuity to be purchased from whichever company offers the best rate. The result of not shopping around or using the OMO could be mean a lower income for life.
The estates of those people who are in income drawdown and die before the age of 75 will also be worse off as the current tax rate is 35%, this will rise to 55% from April 2011. Barry O’Dwyer, deputy chief executive of Prudential UK says: “We believe the government needs to consider this proposal carefully because it runs the risk of hitting basic rate taxpayers particularly hard because an increase to 55 per cent will far exceed the tax relief (20 per cent) they will have gained while they built up their pension pot,”
Will it actually change much though?
For those people who require no risk and a guaranteed income for life an Annuity is likely to remain the preferred option.
When compared with the interest rates currently available on the average deposit account Annuity rates are still attractive. Factor in a possible increase due to health or lifestyle factors and the Annuity rate available could rise still further.
Furthermore, without significant product innovation the charges on income drawdown plans and their complexity will still make it an uncompetitive option for people with smaller funds and leave an Annuity as the only viable alternative.
The changes proposed will benefit those who do not wish to buy an Annuity at age 75. Perhaps because their pension fund is small and they have sufficient income from elsewhere. If this is the case then on death the pension fund would be passed to beneficiaries with no tax deducted.
However, it is without doubt those with larger pension funds or a guaranteed income in excess of £20,000 who will be the real beneficiaries of the new legislation. This view is endorsed by Joanne Segars, chief executive of the National Association of Pension Funds.
‘Extra flexibility can be useful, but these changes will mainly benefit those with larger pensions and multiple income streams. We think that most people will still end up choosing an annuity,’ she said.
‘The bar is high enough to ensure that most people won’t fall back on means-tested benefits, but it’s also high enough to prevent most from using flexible drawdown,’ she said.
The changes will not be introduced until April 2011, however if you are planning to retire or take benefits from your pension between now and this date it is vital you plan with these changes in mind.
Our retirement experts are here to help guide you through the new legislation and discuss how you can benefit from the changes.
If you feel you are affected by these changes then pick up the phone today and talk to one of our advisers. Call us on 0115 933 8433 or 0845 074 7778 and we will be very happy to help you.