Compulsory purchase annuities will be scrapped under new proposals announced by the financial secretary to the Treasury, Mark Hoban.
The new ‘’simplified’ rules will be introduced in April 2011 and aim to simplify a pension regime which has already been simplified (?) by the previous government. At this rate the general public may actually begin to understand pensions, but I wouldn’t hold your breath.
The proposals introduce two potential alternatives to the current obligation to buy an annuity (or alternatively secured pension – ASP for short) at age 75, namely:
- A form of capped drawdown – individuals will be able to determine their level of retirement income subject to a capped limit. This option will also replace ASP for existing investors.
- A flexible drawdown option – this will allow individuals to take unlimited taxed lump sums from their pension pot subject to a minimum income requirement (MIR). Although this MIR has not been determined its main aim is to ensure people don't fritter away their pension fund and then sponge off the state.
Annuity purchase will still be an option and in reality most investors will still go down this route as drawdown is usually only suitable for people with larger pension pots. However, the removal of the age 75 compulsory purchase means that people wanting to purchase an annuity can wait to do so in order to maximise their pension income, rather than be forced to accept a prevailing lower annuity rate.
Elsewhere in the proposals, there will be a change to the taxation of death benefits. From April next year any unused pension funds remaining upon death will be taxed at a proposed "recovery rate" of 55% although there will be no tax levied on an untouched pension pot if the individual dies before the age of 75. Currently people in ASP are liable to an 82% charge at death while those in unsecured pension (i.e. income drawdown) who die before their 75th birthday have been taxed 35%. For the later group, this is quite an uplift and if the new recovery rate becomes legislation people will need to be aware of its implications.
Consultation on the new proposals will end on the 10th September. As soon as legislation is confirmed we will let you know.