Abolition of Compulsory annuitisation

The new coalition Government has now clarified its proposals for the abolition of compulsory annuitisation announced in their first emergency budget, consultation is underway with the intention that the changes will be introduced from 6 April 2011.

The key proposals are:

There will be no requirement to take benefits from a pension scheme at any age, although lump sum death benefits paid from any funds where benefits have not been taken by age 75 will be subject to tax charges.

ASP will be abolished and individuals currently in ASP will fall into the new regime, but only from 6 April 2011.Unsecured Pension (USP) will be split into:

• Capped drawdown – this will be broadly similar to existing USP but may not have the same maximum income limit

• Flexible drawdown – individuals will be able to draw unlimited amounts from their pension scheme subject to being able to demonstrate that they have satisfied the Minimum Income Requirement (MIR). The MIR will involve an individual demonstrating a sufficient level of secure income and we are awaiting further clarification of this but it is likely to include only fixed and guaranteed payments such as pension income.

A uniform tax charge of 55% will be applied to lump sum death benefits paid from pensions in drawdown, and also to benefits that have not been put into drawdown where an individual is over the age of 75. This will replace the 35% tax charge currently applied to USP lump sum death benefits, and the (up to) 82% tax charge applied to ASP.

For those currently in USP or ASP the changes will not apply before 6 April 2011. This means lump sum death benefits will be taxed at 35% in respect of a client who dies in USP before 6 April 2011, but if they die after 5 April 2011 the tax charge will be 55%. In ASP the same principle applies, except that the tax charge can currently be up to 82%, whereas lump sum death benefits would only face a tax charge of 55% on death after 5 April 2011

July 29th, 2010