Treasury sets MIR for flexible drawdown at £20,000

The Treasury has announced that flexible drawdown will go ahead from April 2011, subject to a minimum income requirement of £20,000, despite industry pressure to delay the reforms until 2012.

The Treasury today published its final rules on reforms that will end compulsory annuitisation at age 75.

The maximum income that an individual may withdraw from most drawdown pension funds will be capped at 100 per cent of the equivalent annuity, but will apply for as long as an individual retains the fund. The maximum capped amount that can be withdrawn will be subject to a three year review until a member reaches 75, and annually afterwards.

Sources of income which count towards the guaranteed lifetime income are state pensions, defined benefit schemes, scheme pensions and lifetime annuities. Currently individuals get around £5,000 from their state pension, although this is set to increase as part of the upcoming state pension reforms, which will count towards the £20,000 income limit.

A 55 per cent tax charge will apply to lump sum death benefits. Previously the tax on crystallised funds was 35 per cent, rising to 82 per cent post-75. The Association of British Insurers says the Treasury has not lowered the tax rate far enough.

ABI acting director of life and savings Helen White says: “The Government’s decision to lower the tax rate on funds remaining at death to 55 per cent is good news, although we would have liked to see the level lowered even further.”

Prudential deputy chief executive Barry O’Dwyer says: “An MIR of £20,000 makes sense. The level shows we’re in an era of intelligent policymaking with the Government taking its responsibility to taxpayers seriously. The new proposals modernise retirement income while keeping the elements that currently work best.”

Treasury estimates suggest around 50,000 people currently in a drawdown arrangement could initially benefit from flexible drawdown if they choose to demonstrate they have sufficient secured lifetime income. It says a further 12,000 individuals a year may be able to access flexible drawdown in a “steady state”.

Prior to the changes, the alternatively secured pension provided the only option outside annuitisation post 75. The ASP was subject to a maximum drawdown limit of 90 per cent of the amount of an equivalent annuity, with a minimum drawdown limit of 55 per cent to ensure savings were used to secure retirement income.

Savers were able to access an unsecured pension arrangement pre-age 75, enabling them to leave their pension fund invested while drawing down an income. The maximum that could be drawn down each year was 120 per cent of the amount of an equivalent annuity. Capped drawdown will effectively provide savers with an extension of USP for the whole of an individual’s retirement.

Chancellor George Osborne announced Government plans to remove the effective requirement to purchase an annuity by age 75 in the June budget. The Government issued the eight week consultation a month later.