New Rules Regarding Taking Pension Benefits

In the emergency budget on 22nd June, the coalition government announced their intention to cease the requirement for income to be taken from all pension arrangements by age 75, and agreed to consult on the issue, with a  view to implementing changes from 6^th April 2011.

As an interim measure to be fair to those who would reach age 75 during this consultation period, the maximum age was increased to 77 with immediate effect; this affected those who reach age 75 on or after 22nd June 2010.  However you need to bear in mind that providers do not have to change their scheme rules to allow this flexibility, and it is possible that many may decide not to do so after weighing up the costs of changing their administrative systems against the short period of time for which it will be a benefit.

The Government has now announced its longer term plans, and the key proposals are as follows:

It will cease to be compulsory to take benefits from a pension scheme by any particular age.  However any lump sum death benefits payable from funds where benefits have not been taken by age 75 will be subject to tax charges.

Alternatively Secured Pension (ASP) will be abolished, with people currently in ASP being included in the new regime.  This will not be until 6^th April 2011.

Unsecured Pension (USP – commonly known as income drawdown) will be split into two alternative types:

Capped drawdown
This will be broadly similar to the current USP, although the maximum income limit may be different
 
Flexible drawdown
This will enable people to draw unlimited amounts from their pension scheme, but they will have to demonstrate that they can satisfy the Minimum Income Requirement (MIR).  Money withdrawn under this type of arrangement will be taxable at the individual’s marginal rate of income tax.

The Minimum Income Requirement (MIR) will require individuals to demonstrate that they have sufficient secure income, and likely stipulations will be that the income must:

• Already be in payment
• Be guaranteed for life
• Include some form of protection against inflation

State pensions are expected to be included, as well as any other secure pension income which has inflation protection, including annuities.

The exact level of MIR has yet to be determined, but it is most likely to be at a level which will ensure that the government is protected from any risk of the individual having to rely on state benefits at any time in the future.

It is proposed to apply a tax charge of 55% to any lump sum death benefits paid from pensions in drawdown, as well as to benefits that have not been used for drawdown when the member is over the age of 75.  This will be instead of the 35% tax charge currently applied to USP lump sum death benefits, and the tax charge applied to ASP, which can be as much as 82%.

Clearly these are only proposals at the moment, and there are many issues to be considered, such as provision for spouses.  We will ensure that this site is kept up to date as further developments are announced.

0845 123 5590  or  01325 487192