Her Majesty’s Revenue and Customs (HMRC) have recently released a couple of consultation papers on pension provision, proposing the following:
• Removing the requirement to annuitise by age 75: The need to enter an Alternatively Secured Pension (ASP) agreement at age 75 will be abolished, therefore the 82% tax charge on death will no longer exist;
• Unsecured Pension (USP) can continue until death;
• Drawdown will not have to start by age 75;
• Inheritance tax will no longer apply to pension assets;
• A flat fee of 55% will be charged on transfer of pension assets at any age following death after pension commencement (unless by way of dependent’s pension);
• Death before 75 if no benefits have been taken will not incur a tax charge. There is no reference to what happens to pension assets after 75 if drawdown has not commenced;
• If a client meets a Minimum Income Requirement (MIR) they can take unlimited lump sums from their pension;
• The MIR must be guaranteed for life, i.e. an annuity or defined benefit pension;
• MIR is likely to be in excess of £10,000 per annum but can include the state pension;
• Tax free cash does not have to be taken before 75.
Restrictions on pensions tax relief:
• The Annual Allowance from April 2011 (the amount that can be contributed to a pension scheme and attract tax relief) will be reduced from £255,000 to £50,000. Any contribution beyond the Annual Allowance would effectively not receive tax relief;
• There will be no enhanced protection (old scheme rules being carried forward that would allow larger contributions);
• From April 2012, the Lifetime Allowance – the maximum amount a member can contribute over their working life - will be reduced from the current £1.8m down to £1.5m. So far there has been no announcement on what will happen to members that have already amassed more than £1.5m or will likely breach this barrier before retirement.
In the last round of ‘pensions’ simplification’ – A Day - it was possible to apply for either Enhanced or Primary Protection. In simple terms, these protections afforded protection form penalties to members that either had in excess or were likely to breach the Lifetime Limit, which incidentally was set at £1.5m in 2006. The penalties for breaching the Lifetime Allowance will remain at 25% on the excess for transfers to other schemes and 55% for cash payments to the member.
It is possible that the finer points will change before draft legislation is issued in October.