Main impact of the changes
- There is still a requirement for benefits to be drawn at age 75. The funds of individuals who do not take any action will be transferred into a USP, as opposed to an alternatively secured pension (ASP), the income limits and death benefits rules of which will apply to age 77.
- The fund will still be measured against the lifetime allowance at age 75 and, if its value exceeds the lifetime allowance, a 55% tax charge will still apply on the excess.
- The pension commencement lump sum must be taken within 12 months of reaching 75, subject to the discretion of the provider, and if it is not taken within that period it is lost.
- Those reaching 75 in a USP can stay in it until age 77, subject to the discretion of the pension provider. As a result, should they die in the meantime, a lump sum death benefit will be available, subject to a 35% income tax charge.
Who benefits most from the changes?
The main beneficiaries of these changes are individuals reaching 75 on or after 22 June 2010 who are either already in a USP or who have not drawn down their pension benefits. The underlying fund will be protected for the next generation until age 77 and potentially until they die. However, those with smaller pension funds are still likely to purchase an annuity as this will be the only practical and cost effective option for them.
Although the new rules can override existing rules, it is important to note that pension providers only have to introduce them at their discretion, so don't assume they will do so.
What hasn't changed?
Rules relating to pension contributions and tax relief have not changed. In particular, as there is still a requirement for benefits to be taken at 75, relief would not be given on any contributions after an individual's 75th birthday.
The lifetime allowance remains in place and there are no changes to the rules dictating when pension funds must be tested against the allowance.
A consultation document was issued on 15 July 2010 proposing long-term changes to the annuity regime. It proposes that USP (income drawdown) continues beyond age 75, with any residual fund on death of the member being available as a lump sum subject to a tax charge of around 55%. This would not be liable to inheritance tax (IHT), although it has been made clear that new rules will not provide incentives for pensions to be used as IHT planning vehicles. At present, the tax charge on death before 75 is 35%, and after 75 it is between 70% and 82%.
Under the new rules it is proposed that the uncrystallised pension funds of those that die before 75 will not be liable to a tax charge, while there will be a 55% tax charge on death benefits in all other circumstances.
The level of income that can be withdrawn will still be capped but it has also been proposed that, if a minimum level of income has been secured to prevent individuals falling back on the state, this cap could be exceeded. The minimum level of secured income has not been specified at this stage.
The interim measures will provide some additional flexibility for certain individuals, but these are only temporary. There is still some way to go with the consultation process before the new rules are finalised and while, overall, they are welcome, there are practical and fairness issues which need to be clarified.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.