Changes to the way you can take your Pension

March 6th, 2011

Some important changes are being made to the way people can take their pension benefit from 6 April 2011.  The key points are:-

•    It will no longer be compulsory to take your pension by age 75
•    There will be two types of income drawdown:  Capped drawdown and Flexible drawdown
•    There will be a tax charge on certain lump sum death benefits of 55%

Beyond Age 75

The current upper age limit of 75 by which pension benefits must be taken will be removed which means that uncrystallised (unvested) funds can simply be left in the scheme until such time that an income or tax free lump sum is needed. In-fact, there will be no requirement to ever take benefits at-all.

However, there will be a 55% tax charge on any lump sum death benefit paid from an unvested pension where the member is aged 75 or over. So if you have not crystallised your benefits and not taken your tax free cash element the full amount is still taxed at 55%.  This may mean you are better off taking tax free cash before age 75 to at least avoid the charge on part of your funds

Income Drawdown

Income drawdown is a facility which allows you to make withdrawals from your pension fund rather than using it to buy an annuity.  This has always been subject to certain limits to ensure that you do not take excessive withdrawals and exhaust your fund, however there will potentially be more flexibility going forward for those who can provide evidence of a minimum guaranteed pension income from other sources.

Essentially there will be two types of income drawdown from 6 April 2011:-

Capped drawdown – This will work essentially like an “unsecured pension” does now apart from the following key differences:-

•    Withdrawals of between 0 – 100% (rather than, as currently, up to 120%) of the otherwise available single life annuity you could purchase with the value of your pension fund can be taken
•    The maximum withdrawals you can take will now be reviewed every 3 rather than every 5 years.  On attaining age 75, however, the maximum withdrawals will be reviewed annually.
•    Lump sum death benefits will be allowed from income drawdown funds at any age (a welcome relaxation for the over 75’s) but for deaths that occur after 5 April 2011, the tax charge levied on any lump sum death benefit paid from drawdown funds will be 55% regardless of whether the member is under or over 75.

This compares to the current tax charges of 35% (for those aged under 75) and up to 82% (for those aged 75 or over)

Flexible drawdown is a brand new option that will only be available for those who can evidence a ‘relevant’ lifetime pension income of at least £20,000. This will enable ‘unlimited’ amounts to be withdrawn at any time, but the whole amount of any withdrawals taken by the individual will be subject to income tax at the member’s highest marginal rate in the tax year they are paid.

A ‘relevant’ lifetime pension income essentially means guaranteed pension income only (including state pension).  Income such as rent from a property letting, investment income, and savings income (interest) will not count.

Flexible drawdown is therefore only likely to be relevant to more wealthy individuals.

So what impact could these changes have and what action should you consider?

For those under age 75 who have not yet taken their pension benefits, the impact is relatively straightforward:  Those looking to take maximum withdrawals would need to move into drawdown before 6 April 2011
It should be remembered though that if you will attain age 75 before 6 April 2011, you will still need to crystallise your pension rights before age 75 or any right to a tax free lump sum will be lost.

For those under 75 already in drawdown, care should be taken as transferring your plan after 6 April 2011 to another provider will trigger the lower 100% limit and therefore reduce the income you can take.

This leads to a number of issues as follows:-

If you are already in drawdown and have a drawdown pension anniversary date between now and 5 April 2011 you can request an income review to take effect from the next anniversary date. Your income will then be re-calculated using the current 120% limit with no more reviews until 5 April 2016 (assuming you do not attain age 75 or transfer the fund before then). This review must be requested before the anniversary date though so time is of the essence.

If you are already in drawdown and have a drawdown pension anniversary date after 5 April 2011 provoking an income review on the next anniversary date will bring forward the lower 100% limit and subsequent reviews every 3 years.

If you are utilising phased drawdown and therefore designating funds to drawdown in stages, leaving the maximum amount uncrystallised will make more sense than ever if you are aged under 75 given the increased tax charge levied on lump sum death benefits paid from drawdown funds will now be 55% (increased from 35%) but it will remain at 0% in respect of funds that are not crystallised.

This 55% tax charge is specific to lump sum death benefits – death benefits paid as a dependant’s pension escape this tax charge.

Summary

As you can see the new rules can throw up a degree of complexity and therefore – whether you are already utilising income drawdown or simply approaching retirement and considering how you take your pension benefits  – it is important to seek advice in respect of the right option for your own circumstances.   It is important to remember that income drawdown is riskier than purchasing an annuity – unlike an annuity there is no guarantee an income would be paid for life.  This option is therefore is not suitable for everyone.

The above is based on our understanding of legislation drafted for inclusion in Finance Act 2011.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.  The value of your investment can go down as well as up and you may not get back the full amount invested