New Pension Regime - Government Announcement 9th December 2010
Detailed below are the key points arising from the Government's announcement on 9th December 2010 regarding the future direction of pension provision in the UK: -
Removal of obligation to purchase an annuity at age 75
Although an individual technically can do this presently via Alternatively Secured Pension this is a complex and not popular option.
Individuals with money purchase pension funds will now be able to defer the decision indefinitely beyond age 75 from 5th April 2011. Also the condition that age 75 was the final date by which tax free cash could be taken is being removed. This option may now be taken after the 75th birthday.
There will continue to be a Lifetime Allowance test at age 75 and a charge will apply at the time on funds in excess of the Lifetime Allowance.
Protection from the Lifetime Allowance charge
The Government has previously announced a reduction in the Lifetime Allowance from 6th April 2012 from £1.8 million to £1.5 million.
Where protection already exists, such as Primary or Enhanced, this will remain intact. However, there will be an additional form of protection introduced called ‘Fixed Protection’. The Government has recognised that some individuals will have planned their pension funding based on the current allowance of £1.8 million, and who could therefore be adversely affected by the reduction.
Therefore these persons may apply before 5th April 2012 for Fixed Protection which will maintain the allowance at £1.8 million. There are several conditions that have to be met including that no money purchase contributions can be made on or after 6th April 2012, nor can there be any defined benefit (final salary) annual accrual from membership post 5th April 2012. In other words, in regard to the latter, active membership of the employer scheme would have to cease.
Protected Tax Free Lump Sums
Individuals with an existing protected lump sum at ‘A’ day (6th April 2006) will maintain the 20% up-lift in this figure since that date which reflects the same level of increase in the Lifetime Allowance.
There will therefore be no corresponding reduction when the Lifetime Allowance decreases.
Income Drawdown (or Unsecured Pension Income)
In addition to the Capped Drawdown option (similar to the existing version) there will be a new Flexible Drawdown option.
From 6th April 2011, individuals over age 55 that meet the ‘Minimum Income Requirement’ (MIR) of at least £20,000 per annum will be able to drawdown an unlimited amount of their pension funds. Such withdrawals will be treated as income for tax purposes. Income included for satisfying the MIR must be guaranteed and payable for life such as state pensions, level annuity income and scheme pensions.
On death, any lump sum death benefit from an Income Drawdown pension fund will be firstly taxed at 55%, a rise form the current 35%.
Should you have any queries or wish to discuss any of the points raised, please contact Jeff Crewdson on 0161 477 6789.
Date of Article: 13th December 2010
