Removing the need to annuitise post 75

If you read the personal finance sections of the weekend press, you will no doubt see comments on the announcements made over the last couple of days in respect of the withdrawing of the need to buy an annuity with pension funds post age 75. Our view is that:

• Governments of all persuasions seem incapable of leaving pensions alone.
• The rules before these changes worked and the new rules won’t make much difference.
• What matters is that the pension funds you have built up during your working life give you the security of income you need when you stop working.
• Unfortunately, you will need expert advice as to how to achieve this, fortunately, we can provide this!

Here’s our potted review of the changes which we look forward to discussing with you where relevant over the coming months:

No need to buy an annuity post age 75

Well actually there is already no need to buy an annuity at 75, it’s just that very few people understand the rules. Until now, if you deferred annuity purchase beyond 75, the major downside was the high level of tax (up to 82%) that would be payable on death which made this unattractive. The new rules simplify this to a flat 55% tax rate on death after drawing benefits. We believe this will make drawdown of pensions very attractive for people who want to leave their pension funds (well 45% of them) to their children.

Those with no dependents can still nominate their funds on death to charity with no tax payable.

Reduction in the maximum level of income that can be drawn from 120% to 100% of a comparable level annuity

This may affect a few individuals who want to draw the maximum income they can from their pension, but those already drawing at the higher level will only see a change from the next review date which could be up to 5 years away.

If you think you should be drawing more than you are currently from your pension, we still have the opportunity to review this before 5 April 2011.

Tax free cash sums can be drawn post age 75

If you don’t need your tax free cash by age 75 you can now defer drawing it.

Our view is that if you know you will pay maximum 40% IHT on your cash if you draw it, but potentially 55% if you leave it, why would you leave it?

Minimum Income Requirement (MIR) will be set at £20,000

Under the new rules, if you have guaranteed pension income of at least £20,000pa, you will be able to draw unlimited sums from your pension funds, albeit subject to Income Tax at your highest marginal rate.

This new rule, although not generous, allows those of you with big pension funds to get your hands on your money far sooner than by taking income calculated by reference to annuity rates. If you have £20,000 of guaranteed income and don’t mind 40%, or possibly 50% Income Tax why not draw your fund sooner than later.

Conclusion

As ever, we will discuss the changes on a 1:1 basis if they affect you, but if you need any clarification, please don’t hesitate to call.