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.”