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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 The maximum capped amount that can be withdrawn will be subject to a three year review until a member reaches 75, and annually afterwards.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.


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. paolo standerwick 9th December 2010 at 11:40 am

    Crafty so and sos’. 55% up front is probably better than 35% and maybe no 40% if below IHT threshold.

    Money in the pocket now is worth more than maybe more later! More gvt spin.

  2. Paolo, you old cynic.

  3. Making it up as they go along….

  4. Still too restrictive !

    The truth is that pension tax relief is largely illusory (especially for standard rate tax payers) and most people would be well-advised to steer clear of defined-contribution pension schemes (unless they are receiving a decent contribution from the employer) altogether.

    NEST (or whatever they are calling it this week) will decimate personal pensions so several life offices (and quite a few adviser firms) may well go bust !

  5. mama mia, maria come here and see what the gov’t have done for us! I told you we are better here in the Uk than going back to Italia! Can you trust Senor Barusconi? more?

  6. Bit concerned that the £20,000 limit only takes into account pension related income and nothing from savings. Assuming just £5,000 from State pension and a 6% equivalent annuity rate; you would need a pension pot of £250,000 to qualify. Many investors, myself included, have spread investments further than just pensions and may not benefit from the change in rules even though they are financially secure.

  7. And it’s still not a patch on the 401K rules in the USA.

    A simplification – they take the fund, divide it by the number of years’ life expectancy and that is the maximum is what you are allowed to draw.

    You continue to invest your money and a year later perform the same calculation again.

    Taxing the fund at all seems wrong to me, if there is a widow/er. If there isn’t one then what is wrong with the fund going into the deceased Estate and bearing IHT within the rules?

  8. Norm

    Frist sentence is OK. Second sentence is wrong. In US Tax law, the number obained by dividing fund value and life expectancy is the MINIMUM you MUST withdraw (after age 70 1/2). There is no cap on the maximum you can withdraw, at any point in life (except prior to age 59 1/2). You just pay income tax at whatever rates exist at the time.

    You are very right that this is a much more civilised way of dealing with pension pots than exists (or will exist) in the UK. In the US, individuals are treated as adults rather than children. I wish this were so in the UK, but decades of the nanny state has made even highly qualified and intelligent people cow before those who must be obeyed…..

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