The Treasury announced on the 9th December 2010 its draft Finance Act legislation. This includes major changes to existing pension legislation. It is expected the changes will take effect on the 6th April 2011 but it is important to bear in mind that until enabling legislation has been passed – the following are only proposals.
Having said that the “pension industry” appears to welcome the changes, and the coalition government has a sufficient majority to pass the proposed legislation.
Although not part of the draft Finance Act legislation it should be borne in mind that from 1st January 2011 that index-linked occupational final salary pension schemes will be linked to Consumer Price Index (CPI) instead of Retail Price Index (RPI). CPI has historically been lower than RPI. If this trend continues it will adversely affect the pension benefits payable from a final salary scheme.
Key Proposals:
1. Age 75 rule abolished. At the present time on reaching age 75 pension benefits have to be taken if not previously taken. At age 75, the option being a Pension Commencement Lump Sum (PCLS) of up to 25% of the value of their pension fund and compulsory pension annuity or an Alternative Secured Pension (ASP).Taking the PCLS can be deferred after age 75 (there will be no maximum age for commencement of benefits). The Lifetime Allowance test is still applied at age 75 (there will be no maximum age for commencement of benefits). The Lifetime Allowance test is still applied at age 75.
2. Income drawdown can be used indefinitely or no income is taken, it can be deferred.
3. ASP is to be scrapped.
4. Flexible Drawdown Option. If a person who is over age 55 already has a “secure pension” income of £20,000p.a when they first go into flexible drawdown option they can take as much income from their pension fund as they wish. Once this option has been selected it will not be possible to make further pension contributions either in the option year or subsequent years.
5. The secure pension fund can include the State Pension, and guaranteed income from other pension schemes and lifetime annuities. It does not need to be index-linked. Income from investments does not qualify as pension income.
6. Capped Drawdown is the new name for what is currently current drawdown. The maximum pension income that can be taken each year will be subject to a “cap” equivalent to a single life level annuity calculated by reference to the Government Actuaries Department tables. This is a reduction from the present maximum of 120% of annuity income. The cap will take account of age and sex. The maximum income will be reviewed every 3 years instead of the present 5 years and after age 75 will be reviewed annually. There is no minimum income requirement. New tables are to be produced for ages over 75.
7. Death Benefits and tax charges. On death whether in Flexible Drawdown or Capped Drawdown or after age 75 the remaining fund can be used to provide an income to a spouse or dependent. Alternatively, it can be passed to a beneficiary of choice subject to a tax charge of 55% (currently 35% ) unless the paid to a charity when there is no tax charge. When this is compared to the current lump sum charge of up to 82% (IHT and unauthorized payment charge)after age 75-it is a significant improvement.
8. Transitional Arrangements. Those already in drawdown will be subject to the new rules at their next review or a change to a different drawdown arrangement/provider.
The key date for all of the above changes is 6 April 2011. What does that mean for existing pension arrangements?
Existing USP and ASP
Any existing USP and ASP funds are to be treated as drawdown funds from 6 April 2011. Precise treatment depends on the individual’s circumstances.
For a member under age 75 at 6 April 2011, the maximum payable per drawdown year remains at 120% of the existing basis amount until the earliest of:-
. the end of the “current reference period”, and
. (the end of the year in which) the member reaches 75 or there is a recognized transfer out.
The current reference period is taken as the period of 5 years comprising:-
“(a) the current pension year
(b) any unsecured pension years that began after the end of the last reference period ending before 6 April 2011 and ended before that date and
(c) if the sum of the years falling within paragraphs (a) and (b) is less than five, one or more drawdown pension years beginning after 6 April 2011”
The current pension year is “the unsecured pension year which began on or after 7 April 2010”
For a member who reached age 75 on or after 22 June 2010 but before 6 April 2011, the maximum payable per drawdown year
remains at 120% of the existing basis amount only until the end of the current pension year.
For a member who reached age 75 before 22 June 2010, but was still deemed to be in USP from 75 because his whereabouts were unknown.
A member in ASP is treated as in drawdown immediately from 6 April 2011, with his current ASP year becoming his current drawdown year. He keeps his existing “basis amount” for the current year, but can now take 100% of it, with no minimum (so in the run-up to 6 April 2011 any member in an ASP year ending on or after that date need not draw any further ASP at all, though he cannot “undo” any ASP payments already made).
“Flexible” drawdown is potentially available to all existing members in USP and ASP immediately from 6 April 2011, just as it is to members crystallizing funds from that date.
Dependents in USP and ASP have transitional treatment mirroring that of members.
Lump sums and lump-sum death benefits
The changes apply to:-
. any PCLS to which entitlement arises.
. any other LS paid and
. any LSDB in relation to a death occurring on or after 6 April