News & views
News & views
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20 May 2011
Finance (No3) Bill 2011: Confirmation of the new pension rules
Whilst we still await Royal Assent (expected in July 2011), the Finance (No3) Bill 2011 provisions affecting pensions largely took effect from 6 April 2011.
Annual Allowance
The Annual Allowance on pension savings for 2011/12 is set at £50,000. Tax relief is available on personal contributions at the individual‟s highest marginal rate up to their available annual allowance.
In addition an individual can potentially utilise the three previous tax years unused annual allowance via a newly introduced provision called "Carry Forward".
Where the annual allowance has been exceeded an individual can now request that pension scheme funds are used to meet an annual allowance charge if this is greater than £2,000.
All the previous complex rules restricting tax relief on pension contributions known as the "anti-forestalling" provisions, affecting those with "relevant income" over £130,000, have been withdrawn.
Unsecured pension and alternatively secured pension
Both the terminology and the rules governing both unsecured pension (before age 75) and alternatively secured pension (after age 75) have been removed. There is no longer a requirement to crystallise pension benefits at age 75 and both pension and lump sum benefits can be deferred until any age. However, the lifetime allowance test at age 75 on the value of uncrystallised benefits will remain.
In place of unsecured pension and alternatively secured pension are two new forms of income withdrawal known as 'capped drawdown' and 'flexible drawdown'.
Capped drawdown
Similar to unsecured pension, capped drawdown places an annual limit on the maximum amount of income that can be withdrawn. However the maximum amount has been reduced from 120% of the equivalent annuity to 100%. In addition the tables used to calculate the equivalent annuity have also been reviewed by the Government Actuary‟s Department, which in many cases will lead to a further reduction in the maximum level of income.
The maximum income will be reviewed every three years before age 75 (as opposed to the previous five yearly reviews) and then annually following the pension year end after an individual reaches age 75.
The maximum tax-free lump sum will remain at 25% of the lifetime allowance or the size of the fund if lower. It is encouraging to see comment that the tax free lump sum is regarded as an important and desirable element of pension benefits in the long term.
Flexible drawdown
Flexible drawdown allows unlimited pension income withdrawals 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' or 'MIR') to prevent them falling back on the State.
The MIR has been defined as guaranteed pension income of at least £20,000 p.a. This will include most 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 dependents. Income from other non-pension assets, including purchased life annuities, will not count toward the MIR.
Consequently, flexible drawdown will allow an individual or on death, a dependant, to take income exceeding that permitted under capped drawdown rules and limited only by the value of the available fund.
All income payments under both capped and flexible drawdown are subject to income tax at the individual's highest marginal rate.
There are also anti avoidance provisions to prevent individuals from seeking to manipulate flexible drawdown and avoid income tax by becoming a non UK resident for a short period of time.
Transitional Arrangements
Whilst the changes affect all new drawdown pensions from 6 April 2011, in order to provide a degree of certainty and adjustment, the legislation states that for individuals with an existing pension in drawdown, the new rules governing withdrawal limits under capped drawdown for those under 75 will apply only from the date of their next scheduled compulsory review. The increased limit (i.e. now 100% from 90%) for those in drawdown over 75 applies from 6 April 2011.
If you would like to learn more, please speak to your usual contact at Towry.
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