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Revolutionising income drawdown
The Government is consulting on a new approach to drawing down “money purchase” pension fund which it plans to put in place from next tax year. They have detailed plans to scrap Alternatively Secured Pension – the income drawdown rules that apply from age 75 – and allow people to draw down unlimited amounts from their pension fund, provided they have a minimum level of secured pension income (e.g. from the State, an insurance company or a “final salary” pension scheme).
From 6 April 2011 the Government proposes that a new form of “capped income drawdown” will apply that will be very similar to the existing income drawdown regime. An individual would be allowed to draw any amount up to the annual limit and there will be no age limit by which time this form of income drawdown must cease. However, drawdown funds left on death and not used to provide a dependant’s pension would be taxed at 55% whatever age death occurs. This is a much fairer position than is currently the case for those dying over age 75, where the rate can be as high as 89%, but is an increase on the 35% rate applicable prior to age 75 and may disadvantage basic rate taxpayers.
For those who can demonstrate that they have a minimum level of secured pension income and will therefore not fall back on State care – by meeting a yet-to-be-decided Minimum Income Requirement – the Government is proposing that a new form of “flexible income drawdown” which would not be subject to any annual limit. This means that those individuals could draw out their entire fund in one go, less income tax, provided they have secured a certain level of income elsewhere.
The plans may be altered or even rejected before 6 April 2011 as they are currently going through a period of consultation – ending in September - and so it is perhaps right to be apprehensive about whether people will really be allowed to exhaust the bulk of their pension pot in a single year. By the time the new rules actually come into force, we may find that there are some additional restrictions in place which stop this happening.
The table below summarises some of the key differences between the current rules and the proposed rules:
|
Current Rules |
Proposed Rules |
Unsecured Pension |
Alternatively Secured Pension |
Extended Unsecured Pension |
Capped Drawdown |
Flexible Drawdown |
Eligibility |
Aged 55 to 75 |
Aged 75 or over |
Aged 75-771 |
Aged 55 or over |
Aged 55 or over with sufficient secured pension income |
Drawdown Limit |
120% of annuity rate2 |
55% to 90% of annuity rate2 |
120% of annuity rate2 |
tbd |
No limit |
Tax on Lump Sum Death Benefits |
35% |
55% to 89.2% |
35% |
55% |
55% |
1 Must be born after 22 June 1935
2 The annuity rate is found using the tables published by the Government Actuary’s Department and if often referred to as the GAD rate
Barnett Waddingham will be responding to the consultation. The consultation paper can be downloaded from the HM Treasury Website.
Andrew Roberts
Partner