The Treasury has issued further draft and updated legislation regarding a number of pension related matters. They signal a radical shift in pensions thinking, led by confirmation of the removal of the need to annuitise by age 75 as well as the annual contribution allowance.
As all the proposed changes are coming into effect on the 6th April 2011 there is real urgency in interpreting and implementing these updates into Imago.
The annual allowance of £50k has re-introduced pension input periods and will need monitoring as there is an allowable carry forward for a period of 3 years. Methods of payment of any annual allowance charges for over-contribution are still under consultation.
The lifetime allowance will be reduced from £1.8mto £1.5M from 6 April. As such a new lifetime protection for transitional cases where a client’s pension exceeds the new limit has been defined. The transitional protection needs to be applied for prior to April 2012 and any additional accrual must also cease in advance.
The need to crystallise before any age has been removed. In other words the client can crystallise at any point from 55 and will have no restriction on their ability to take the 25% lump sum after 75.
A tax charge of 55% will apply on death for funds in drawdown, unless there are no dependents and it is paid to a charity. This is an increase from the current 35% for USP cases.
There will be no tax charge on death for undrawn funds until age 75, where it will become 55% unless
there are no dependents and it is paid to a charity.
Lump sums paid as a serious ill health lump sum will be also be taxed at 55% after the age of 75.
ASP and USP are replaced by flexible and capped drawdown.
Capped drawdown
Income limits revert back to 100% of GAD for the maximum and £0 for the minimum regardless of age after the client reaches 55.
Income reviews move back to tri-annual if the client is under 75 and annual for clients over 75.
Income reviews will be handled as follows during the transition period:
- For clients of age < 75 the income limits are reviewed at their next reference date.
- Note that the current reference date has been preserved unless the client transfers or turn 75. In other words it could be up to 5 years.
- Note the income review for a transfer is only at the end of the drawdown year not at the transfer date.
- For clients of age > 75 and in ASP the income limits must be reviewed in the current income year. In most cases clients should not be worse off as the drawdown limit is now 100% of GAD instead of the 80% in ASP.
- For clients of age 75 from 22 June 2010, the income review need to be done at the anniversary of their current drawdown year.
Flexible Drawdown
Where an individual can satisfy the Minimum Income Requirement (MIR) they may take any level of
income from their flexible drawdown arrangement.
The minimum annual income requirement is set at £20,000, which must be a secure pension income for life
which includes:
- State pensions
- Lifetime annuity of dependent’s lifetime annuity
- Scheme pension or dependents scheme pension
- Overseas pension payment equivalent to a lifetime annuity or scheme pension
The Minimum Income Requirement (MIR) cannot be satisfied by drawdown payments, dependent drawdown
payments or overseas pensions equivalent to drawdown.
Increases to the Minimum Income Requirement can be made by treasury order, but it is not automatically linked to RPI or CPI.
Once in flexible drawdown no further tax relievable pension contributions can be made to any pension
scheme and an investor cannot remain an active member of a defined benefit scheme
