The current rules governing both unsecured pensions (before age 75) and alternatively secured pensions (after age 75) will be abolished. Instead, there will be two new forms of income withdrawal known as ‘capped drawdown’ and ‘flexible drawdown’.
This will place an annual limit on the maximum amount of income that can be withdrawn. However, the maximum amount will be reduced from 120% of the equivalent annuity to 100%. This maximum income level will be reviewed every three years before age 75 and then annually following the pension year end after an individual reaches age 75.
Flexible drawdown will enable unlimited pension income payments from defined contribution arrangements, including the ability to withdraw the whole pension fund as a single income payment. This will be available to those who can demonstrate they have already secured other sufficient minimum pension income (the ‘Minimum Income Requirement’ (MIR)) to prevent them falling back on the State.
The MIR has been defined as pension income of at least £20,000 p.a. This will include pension annuities, final salary scheme pensions and any State pension in payment. There is no requirement for this minimum level of income to be inflation proofed or to provide any pension for dependants.
Consequently, flexible drawdown will allow an individual or, on death, a dependant to take income above annual capped income at any time. In contrast to capped drawdown the amount which can be taken under flexible income drawdown after securing the MIR, is limited only by the value of the available fund. Any sums taken will, however, be subject to income tax at the individual’s highest marginal rate.
Whilst the changes will affect all new drawdown pensions from 6th April 2011, in order to provide a degree of certainty and adjustment, the Government has proposed that for individuals with an existing drawdown pension, the new rules governing withdrawal limits under capped drawdown should apply only from the date of their next scheduled compulsory review.
Where no benefits (including tax-free cash) has been taken from a pension (uncrystallised funds), there will be no change to the taxation of death benefits before age 75, i.e. all the fund can be paid as a tax-free lump sum.
However, the current 35% tax rate on lump sum death benefits from pension from which benefits have already been drawn (crystallised funds) before age 75 will increase to 55%.
The same 55% tax rate will apply to all lump sum benefits on death after 75, for both uncrystallised and crystallised funds. Inheritance tax will no longer ordinarily apply on death after age 75. However, HMRC will monitor carefully for any sign of abuse and may issue further legislation if required.
By Robert I Fraser