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Treasury to introduce new flexible and capped drawdown regime

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The Treasury is proposing to replace alternatively secured pensions with capped and flexible drawdown options from April 2011.

Speaking in Westminster today, Treasury financial secretary Mark Hoban launched a consultation on removing compulsory annuitisation at age 75.

Hoban unveiled proposals that allow people who do not want to purchase an annuity to take capped drawdown, the equivalent of an unsecured pension extended beyond the age of 75, for the whole of their retirement.

The Government is also proposing flexible drawdown, where individuals will be able to draw down unlimited amounts from their pension pot, provided that they have secured a minimum income to prevent them from running out of savings and falling back on the state.

The Government is consulting on what the minimum income should be over the next eight weeks. The consultation will close on September 10.

The consultation paper states that individuals who are already in ASP will be able to benefit from the new flexibilities, contradicting advice given by the Treasury earlier this month which suggested this would not be the case.

Pension benefits drawn down under the new arrangements will continue to be taxed at income tax rates and the tax-free pension commencement lump sum will continue to be available.

Any unused funds remaining upon death will be taxed at 55 per cent if the individual is over 75.  Death benefits for those who die before age 75 without having accessed their pension savings will remain tax-free.

The Government says inheritance tax will not ordinarily apply to unused pension funds remaining after death in addition to the recovery charge but it adds that it does not intend pensions to become a vehicle for the accumulation of capital sums for the purposes of inheritance.

The Government says it will ensure that the tax rate on unused funds remaining on death does not leave open incentives for pension saving to be used to reduce IHT liabilities and will monitor this closely and take further action if there is evidence of such activity.

The Treasury estimates that pension and annuity providers will face a total one-off cost of £7m to change to the new scheme and ongoing costs of £2m per year.

Cicero Consulting director Iain Anderson says: “This is a major announcement from HMT on annuity reform. It is much more flexible than anyone predicted. It is a real victory for reform and a great opportunity for providers to innovate and advisers to advise.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Please send this to Mr Eidinow and Mr Foley

  2. Julian Stevens 15th July 2010 at 2:25 pm

    Wrong, wrong, wrong. What kind of simplification is this? None at all that I can see.

    The age 75 rule should be scrapped, tax charges on unspent funds should be scrapped, the shackle of GAD Rates should be scrapped.

    Anyone disagree?

  3. You must be joking 15th July 2010 at 2:26 pm

    A step in the right direction, without a doubt!

    Let’s hope there’s not too much “devil in the detail” but certainly a promising start!

  4. Right right right 15th July 2010 at 2:36 pm

    This is a substantial good step in the right direction and very good news. Releasing some of the constraints of pensions at the business end will encourage far more poeple to save properly for retirement in the fist place. It is unrealistic to expect tax free death benefits on unspent funds. These would just become one huge IHT loophole.

  5. Peter Davies @ Create Wealth 15th July 2010 at 3:10 pm

    The new government is moving in the right direction – the current regime for ASP was totally crazy. However, why is the balance of someone’s Pension Fund to be taxed at 55% when other assets are only taked at 40%. I guess its to repay the tax relief that was afforded whilst contributing. However, if the individual was only a 20% taxpayer and only received 20% tax relief and is not subject to IHT when they die, then 55% still seems a very punative rate. The government HAS to make pensions are more attractive option. With more and more people being forced into Money Purchase Schemes its a great tax winner for the goverment as fewer people will buy annuities. I guess we will see the life assurers develop a new breed of flexible drawdown ‘guaranteed’ income schemes in due course.

  6. As I understand the situation death after 75 in USP will NOT automatically lead to a 55% tax charge if a widow(-er) is around and the survivor taking an income will still be the first port of call for the funds remaining
    Some tax on a fund passing to relatives after age 75 is probably justifiable – pension income and anti IHT measures are two different things and it will be argued that the government does not wish to give tax advantages for you to avoid IHT – but why 55%? and why 75?

  7. Provided you could draw down the 25% tax-free lump sum at a time of your choosing I don’t see any issues with these proposals.

    If say I took a 25% lump at age 65 and was able to live comfortably until 75 (at least) off it and my other incomes then I wouldn’t see any reason to even consider taking out an Annuity.

    Taxing what’s left when I die before the balance goes to my kids is a helluva lot better thought to me than what we have at present

  8. The problem with this is that one of the reasons people dont like annuities (ignoring the guaranteed element of them) is low annuity conversion rates. The removal of annuitisation at age 75 is that rates will fall even further.

  9. At last, some sign of common sense and fairness towards those who have saved for their retirement.

    I might be able to start recommending pensions at last.

  10. Robert Donaldson 15th July 2010 at 6:38 pm

    Why can’t they let the unused pension pot pass on to the next generation by way of a pension pot for them, bearing in mind that we have a cap on the amount in pensions.

    This would be the same as a final salary scheme when someone dies, the remaining hypothetical unused fund is left for the benefit of the remaining members of the scheme.

    This would assist some of the next generation who are going to have very poor pension rights unless they do some serious savings themselves.

  11. Does anything think that starving the Life Co’s of funds re annuity books might have some sort of knock on effect on the annuity rates moving forward? 😉

    Hell, pension reform is long overdue, but maybe the knock on effects will actually make annuities an endangered species.

    Of course, this is really hot air, as the average pension pot is about £25K so drawdown or no, there is still b****r all in the pots to actually drawdown.

    We need incentives or compulsion to get pension pots of a reasonable size. Maybe the changes will have a positive effect?

  12. A step forward yes, why not include an option to pass death benefits into your immediate family’s pension arrangements tax free. The tax recovery (as their surely has to be) would come from the familys pension arrangements and we may start to deal with the longer term issue of having sufficient independent means to support ourselves. Any funds withdrawn would be subject to either income tax or the 55% charge on death.

  13. @Robert Donaldson, @Andy Dyson
    The answer to your question why not let the money pass down the generation is, at least in Andy’s case, answered by the question. It is simply the fact that there would be no taxation generated. No government wants to tie money up indefinitely in a tax preferred environment without the possibility to dip into it.
    It would seem reasonable to tax residual funds in-line with IHT at 40%. As there has been tax elief on the way in it would seem reasonable that there is no exempt amount ie every penny is taxed. However it would also make sense to allow a transfer into another persons pension after deducting 25% tax which would be the same as adding basic rate relief onto the 60% you would otherwise receive but allow you to contribute the full amount.
    This would continue to provide revenue to HMRC, in part avoid people loading up their pensions to escape IHT and increase the amount of money set aside for the population i general for their retirement.
    Steve

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