now we are 75
by Roderick Ramage, solicitor, www.law-office.co.uk
first published (by distribution to professional contacts) on 1 January 2012
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
On 6 April 2011 annuitisation at age 75 ceased to be necessary. The Finance Act 2011 made significant changes to the FA 2004, of which the main points (but not the all important detail) are noted below.
the old law
under age 75 A member’s draw-down (‘unsecured pension’) could be any amount from nil to 120% of a notional single life annuity according to tables published by the Government Actuary’s Department (GAD). On death the remaining fund could be paid as a lump sum subject to a tax charge of 35%. A tax free lump sum of 25% could be taken on the start of drawdown (‘pension commencement lump sum’) even if the draw-down rate was nil.
from age 75 A member’s draw-down (‘alternatively secured pension’) could be any amount from 55% to 90% of a notional single life annuity according to GAD’s tables. On death the remaining fund could be paid as a lump sum subject to a tax charges, whose cumulative effect including inheritance tax, could be an effective tax rate of 82%. No pension commencement lump sum could be taken.
the new law
The broad effect of the Finance Act 2011 is to enable pension to be taken in new forms of drawdown at any age from 55, the existing earliest age at which pension can normally be drawn from a registered pension scheme as an authorised payment, and, by reducing the overall amount of tax payable on lump sum payments on the death of members aged 75 and over, to remove the tax obstacle from continuing drawdown after that age. The expressions ‘unsecured pension’ and ‘alternatively secured pension’ have been replaced by ‘drawdown pension’, of which there are two forms, ‘capped drawdown’ and ‘flexible drawdown’.
capped drawdown This is the normal form of drawdown. (The expression ‘capped drawdown’ is not used in the legislation, but appeared in HMRC’s draft guidance of 31 March 2011 ‘Pensions: Draft Guidance on Changes to the Benefits Rules under Registered Pension’.) There is no minimum amount of drawdown, but drawdown may be any amount from nil to 100% of the ‘basis amount’, which is a notional single life annuity according to GAD’s tables. Drawdown may also be taken as a short-term (< 5 years) annuity.
flexible drawdown There is no upper limit to the amount of a member’s drawdown, which means that the member may draw down any amount that he or she wishes, if:
- the member makes the necessary declaration to and it is accepted by the scheme administrator;
- the member has ‘relevant income’ of at least £20,000 pa, which includes scheme pensions and lifetime annuities from registered pension schemes and social security pensions, but does not include drawdown pensions or other non-pension income (eg dividends, rentals, purchased annuities);
- no contributions are paid to a money purchase registered pension scheme in respect of the member; and
- the member has ceased to accrue benefits in a salary related or cash balance registered pension scheme.
income tax All drawdown, both capped and flexible, is taxed as income.
contributions from age 75 No tax relievable pension contributions can be made in relation to a person who has reached age 75.
pension commencement lump sum A tax free lump sum of 25% may be taken on the start of drawdown, even if the draw-down rate is nil, and may be taken after reaching age 75.
lump sum on death No inheritance tax will chargeable on any lump sum payable on the death of the member. The remaining fund may be applied:
- as a lump sum (a) subject to tax at 55% if the member was 75 or over, but tax free before that age if the funds has not been designated as available for drawdown, but (b) otherwise at 55% at any age;
- in providing a pension for a dependant, which can be a scheme pension, a lifetime annuity or a drawdown pension; or
- by giving it tax free to charity, if there are no dependants of the member.
serious ill health lump sums The whole of the member’s fund, if his or her lifetime allowance is available, can be paid as a lump sum if there is evidence from a registered medical practitioner that the member has less than twelve months to live. This remains tax free if the member is under age 75, but is taxable at 55% if the member is aged 75 or over.
reviews The level of drawdown for members under age 75 must be reviewed at least once every three years, down from five years under the previous law. The requirement for annual reviews for members aged 75 or older remains unchanged.
transitional Members under age 75 continue to draw income based on the previous limits until the end of their current five year review period, and those aged 75 or older on 6 April 2011 continue to draw income based on the previous minimum and maximum limits until the start of their next annual review. Special rules apply to members who attained age 75 between 22 June 2010 and 5 April 2011.
copyright Roderick Ramage
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