Compulsory Annuities �Get the Chop� (March 2011)

A new set of rules concerning pensions will be put in place shortly. Although the proposals are currently working their way through the parliamentary process they are due to take effect from April this year.

The highlights include:

Income and tax-free cash can still be taken at any stage after age 55 OR it is possible to defer benefits indefinitely
Complex rules about drawing an income after age 75 are scrapped
Tax-free cash can be paid post age 75
Once someone has a secure pension income of £20,000 pa gross, they can take the balance of their fund as a taxable lump sum

Flexible Drawdown

Flexible drawdown will allow unlimited withdrawals from a pension fund as long as the individual can meet the Minimum Income Requirement (MIR). Initially, this will be set at £20,000 per year regardless of age or marital status etc. It will be based on a secure income comprising only pensions i.e. one or more state pensions, annuities and occupational pensions that are guaranteed for life.

Earnings, investment income, purchase life annuities (PLA) and drawdown pensions do not count towards the MIR. Any payment will be subject to income tax at the individual�s marginal rate.

Anyone who takes up the flexible drawdown option cannot contribute to a money purchase scheme (e.g. a personal pension) in the tax year and active membership of any defined benefit scheme must cease. In other words there will be no tax relief on pension contributions even if someone wishes to pay less than the new annual allowance of £50,000.

Capped Drawdown

Capped drawdown will be similar to the current arrangement for drawing a pension directly from investment funds (known as Income Drawdown or Unsecured Secured Pension). However, the maximum withdrawal will reduce to 100% of the Government Actuary Dept (GAD) limit.

If you are taking the maximum income under current rules, this will have to change at the next formal review which must happen at least every three years before age 75 and every year thereafter. As at the moment, it will be possible to take tax-free cash and no income.

Lump Sum Death Benefits

On the death of someone under 75 who has not started taking benefits (known as uncrystallised policies), the entire proceeds of a pension policy can be paid as cash to anyone tax-free. In all other circumstances (e.g. after 75, or pre-75 if an income had been taken) there will be a 55% tax charge on lump sums paid on death. Cash can be paid to a charity tax-free but only in the absence of a living dependant.

Lifetime Allowance

All benefits will be tested against the Lifetime Allowance (LTA) by age 75. The limit will be reduced to £1.5 million with some protection for those who now find themselves with funds in excess of this.

Inheritance Tax (IHT)

There will be no explicit IHT charge on death of a pension scheme member. Clauses in Section 3 (3) of the IHT Act 1984 (the so-called �Omission to Act� rules) will no longer apply to pension scheme lump sum death benefits.

For a bespoke assessment of how the changes could affect you, please contact your Cartlidge Morland consultant.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

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