The Treasury plans to carry out a series of changes to the pension tax system following radical liberalisations announced in the Budget.
The official Government response to the Budget consultation, published today, sets out proposals to amend tax legislation in a bid to encourage a wave of product innovation.
The new rules will allow annuity payments to decrease, freeing up providers to develop more flexible retirement income products tailored to consumers’ income needs.
In addition, savers will be allowed to take lump sums from lifetime annuity products, provided this is specified in the contract at the point of purchase. Policymakers believe this will encourage insurers to structure more flexible products that are capable of meeting specific circumstances, such as care needs.
The Treasury also plans to remove the ten-year guarantee period for guaranteed annuities.
“This will allow providers to create annuities that ensure more of an individual’s fund is returned to their families in the event of their death,” the Treasury says.
The Government will also allow payments from guaranteed annuities to be paid to beneficiaries as a lump sum, provided the annuity is worth less than £30,000.
In a bid to prevent so-called ‘pension recycling’ – where savers use the new flexibilities to reduce their tax bill – the Treasury has confirmed it will introduce a £10,000 annual allowance for those who choose to access their pension from age 55. This will also apply to savers currently in a flexible drawdown arrangement.
Savers in capped drawdown on 5 April 2015 will be able to retain the £40,000 annual allowance, provided they do not take more than 150 per cent of GAD as income.
While people who buy traditional standard annuities will continue to have access to the £40k limit, it is understood those who purchase one of the new breed of annuity products – such as an annuity which allows payments to decrease – will have an annual allowance of £10k.
The minimum age at which people can withdraw their pension without being hit by tax penalties will rise from 55 to 57 in 2028. It will remain ten years below the state pension age from then on.
The Government has also confirmed it plans to reduce the death benefit charge, which currently stands at 55 per cent. Further details will be published in the Autumn Statement later this year.
However, the Government has backed away from proposals to introduce a statutory override to ensure pension scheme rules do not prevent individuals from taking advantage of the new flexibilities. Instead, a permissive statutory override will be brought forward to allow schemes to ignore their own rules if they wish.
The document says: “The Government believes that the introduction of a statutory override mandating that schemes provide flexible payments would be disproportionate.
“However, several respondents highlighted that some schemes may like to offer increased flexibility to their members, but would prefer not to amend their scheme rules because of the potential legal and administrative costs. In these situations, the government would prefer that schemes were in a position to provide flexibility without having to amend their rules.
“Consequently, the Government plans to introduce a permissive statutory override.”