When I’m 64…er 75…
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Pensions Partner (and Beatles fan) Jennie Kreser looks this month at some interesting recent developments on the pension front; in particular the issue of a consultation document by the Treasury on compulsory annuitisation by age 75.
As many readers will know, the government has already announced plans to scrap the default retirement age, so the need to review the requirement to purchase an annuity by age 75, when (in theory) you might still be actively working, had to be on the cards. |
The current tax rules were drafted on the premise that tax relief is given on the contributions going into a pension scheme on the assumption that tax will be paid on the income (or pension) derived from those contributions – that is on the benefits being paid.
Most members of Defined Contribution schemes, which are, of course, becoming the norm with the demise of Defined Benefit schemes, secure their retirement income by purchasing an annuity. If you don’t want an annuity, the options currently available to you are pretty limited.
Before the age of 75, you can set up an ‘unsecured pension arrangement’ or USP from which you can take a tax free lump sum at retirement and draw down an income from the remaining tax-efficient savings pot as needed, subject to a prudent limit.
After the age of 75, the only choice is an ‘alternatively secured pension’ or ASP. This is similar to a USP, but with a lower maximum drawdown limit and a minimum drawdown limit to ensure that pension savings are used to provide a retirement income.
ASPs were largely intended to be available only to those who had a moral or religious objection to annuitisation, so most members of registered pension schemes are still required to purchase an annuity by the age of 75
The proposals aim to sweep away most of these restrictions. Annuities will still be available, but won’t be compulsory at the age of 75. USPs will be relaxed so that the amount of drawdown will be the member’s choice, subject only to a cap. Indeed, members may choose not to draw down anything at all. The government will also create additional flexibility for individuals who wish to draw down more than the capped annual limit.
Under this flexible drawdown model, individuals will be able to draw down unlimited amounts from their pension pot, provided they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. This ‘Minimum Income Guarantee’ will be the most interesting (and potentially most controversial) thing to define and should make for quite a debate in the pension world. So far, commentators are quietly impressed, but this could change as we all begin to absorb the consequences and potential of this change. As ever, watch this space!
Have your say at Jennie Kreser’s blog spot: http://www.pensionlawyerblog.com/pension-annuity.
To contact Jennie, call +44 (0)20 7749 2700 or email jik@silvermansherliker.co.uk. |
