The Government’s consultation document, ‘Removing the requirement to annuitise by age 75’ contains good news and some bad news.
 
The new proposals will abolish the compulsory purchase of an annuity at the age of 75 allowing investors access to other sources of retirement income. Those who do not want to purchase an annuity can now take an unsecured pension beyond the age of 75.
 
By abolishing the dual regime of an unsecured pension (USP) arrangement before the age of 75 and an alternatively source pension (ASP) arrangement after the age of 75 and introducing a single ‘lifetime regime, the Government is greatly simplifying the system. The new proposals will be called ‘capped drawdown’ and will enable individuals to choose the amount they wish to draw down annually subject to a cap to avoid the risk of running out of funds.
 
However, high net worth individuals who can demonstrate they have secured sufficient minimum income to prevent them from exhausting their savings prematurely and becoming a burden on the State, will be entitled to a ‘flexible drawdown’ regime enabling access to unlimited amounts from their pension pots.
 
The proposals are particularly good news for this group of people as they provide a wide range of tax planning opportunities, more flexibility over choice of investments, control over income taken and discretion over what they can leave to the family rather than the taxman.
 
The bad news is an increase from 35% to 55% in the rate of tax on lump sum legacies where the pensioner has died before the age of 75 after taking benefits from their pension fund. It is also disappointing that the Government has specifically ruled out the facility of allowing the remaining pension fund on death to be reallocated to other family members.
 
The good news, however, is the position of an individual who dies after the age of 75 is improved in two material ways. For the first time it will be possible for a lump sum to be paid in these circumstances, albeit subject to tax at 55%. Second the pernicious maximum tax charge of 82% proposed by the previous administration will be reduced to the flat 55% tax rate.
 
No one likes tax increases and although the 55% rate that now applies to lump sums paid after age 75 is still high, these changes represent a triumph of common sense over ideology.
 
Changes are necessary. The Baby Boomers are now arriving at pensionable age and there are a lot more of them as life expectancy increases and the capability of the State to look after them all diminishes. 
 
Pensions are increasingly recognized as the responsibility of the individual so it’s only right that the individual has some control over it and sees an acceptable proportion going to loved ones on their death.
 
The Coalition Government are to be congratulated for taking a proper look at the issues involved here and for getting these proposals into a consultation document so quickly.
 
The eight week consultation period ends shortly with the proposals coming into effect in April 2011.

For further information:

Contact Mike Wilson, Managing Director of Francis Clark Financial Planning at Francis Clark’s Exeter office. Telephone: 01392 667000

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