Pensions to be become more flexible

 Today ministers will announce changes to pension rules which should give pension savers greater flexibility on how they take their benefits when they come to retire.

(UPDATE 15/12/10 - a follow up article to this one detailing the announced changes can be found here)

 

What might the changes include?

Back in July the financial secretary to the Treasury, Mark Hoban, laid out proposals which included the scrapping of compulsory purchase annuities. The new ‘’simplified’ rules are to form part of the 2011 Finance Bill and will aim to simplify the current pension regime.

The proposals announced by Mark Hoban contained 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 would be able to determine their level of retirement income subject to a capped limit. This option would also replace ASP for existing investors.

A flexible drawdown option – this would allow individuals to take unlimited taxed lump sums from their pension pot subject to a minimum income requirement (MIR). The MIR will be clarified today but its main aim is to ensure people don’t fritter away their pension fund and then sponge off the state.

Elsewhere in the original proposals, was a change to the taxation of pension death benefits. The original proposals suggested that from April next year any unused pension funds remaining upon death would be taxed at a proposed “recovery rate” of 55% although there would 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 proposed recovery rate becomes legislation people will need to be aware of its implications.

Money to the Masses will explain all

Once the announcement has been made I will go through the new legislation and decipher it for you in the coming days. The biggest beneficiaries of these changes, assuming they are broadly in line with the above, will likely be those will large pension pots. So watch this space.

(Image: graur razvan ionut / FreeDigitalPhotos.net)