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In the June 2010 budget George Osborne announced that he was going to scrap the money purchase pension scheme arrangements which virtually require you to buy an annuity by age 75. He said that he would consult over the summer and introduce legislation to be effective from 6 April 2011. In the meantime he increased the age from 75 to 77, to give those close to age 75 breathing space to make a decision.
The position at the moment is that pension schemes can leave the fund invested, with the pensioner taking benefits within certain parameters, from the age of 55 up till the age of 75. At anytime from age 55 the pensioner can use the funds to buy an annuity, if they wish, instead of drawing down income. At the moment, from age 75 the pensioner has to make choices, and these virtually push the pensioner into taking an annuity, whether they like the terms or not.
In addition, if the pensioner dies whilst there is still value in the pension fund that has not been exhausted in providing pension benefits, but after they have started to take pension benefits, there is a tax charge. If the pensioner is under 75, and the death benefits are taken as a lump sum, then this is a charge of 35% of the value of the fund. If the pensioner is over 75 this is a charge of up to 82% of the value of the remaining fund.
At a meeting of industry specialists and the Treasury on Wednesday 15 July 2010, the following proposals were put forward:
The two types of pension that can be taken from the fund at the moment, USP (under age 75) or ASP (over age 75), will be scrapped.
Now there will be either
Capped Drawdown – this is available to everyone, regardless of the size of the pension fund. The level of the Cap has not yet been set.
Flexible Drawdown – this will only be available to those with larger pension funds, able to meet a Minimum Income Requirement (MIR). The level of this MIR has not yet been set.
Any funds left at the death of the pensioner that have not been taken as benefits will be taxed at 55%, regardless of the age of the pensioner. This tax charge of 55% is made as there is no IHT on the funds in the pension scheme (the IHT rate is 40%) and the monies going in to the pension fund were given tax relief at the time, and have grown tax free, so the rate has to be higher than 40% to recoup some of that.
It will still be possible to take a 25% tax free cash sum from the pension fund.
Annuities will still be available, and are still likely to be very widely used.
These are proposals, and it will be important to see what the MIR and the cap levels are. However, generally the Pensions Industry thinks these are good changes that will give lot more flexibility, and there is not likely to be significant changes.
As there are choices to be made regarding how you take your pension, it is important to take specialist advice. Our sister company, Dodd Murray are well placed to advise. Contact them on info@doddmurray.co.uk . Dodd Murray is Authorised and Regulated by the Financial Services Authority.
If you have shied away from pension investments as you were too concerned about the straightjacket rules applying when you need to take your benefits, these changes may be the ideal opportunity for you to think again about a pensions investment.
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