This week some interesting developments on the pension front and in particular the issue of a Consultation document by the Treasury on Compulsory Annuitisation by age 75. As many readers will know, the Government has already announced plans to scrap the Default Retirement Age requirements and so the need to review the requirement to purchase an annuity by age 75 when (in theory) you might still be actively working had to be on the cards.
The current tax rules were drafted on the premise that tax relief is given on the contributions going into a pension scheme on the assumption that tax will be paid on the income (or pension) derived from those contributions – that is on the benefits being paid.
Most members of Defined Contribution schemes which are of course becoming the norm with the demise of DB schemes, secure their retirement income by purchasing an annuity. If you don’t want an annuity, the options currently available to you are pretty limited. Before age 75 you can arrange for an ‘unsecured pension arrangement’ or USP from which you can take a tax free lump sum at retirement and drawdown an income from the remaining tax efficient savings pot as needed subject to a prudent limit. After age 75 the choice is an ‘alternatively secured pension’ or ASP similar to a USP but with a lower maximum drawdown limit and a minimum drawdown limit so as to ensure that pension savings are used to provide a retirement income.
ASP’s were largely intended to be available only to those who had a moral or religious objection to annuitisation so most members of registered pension schemes are still required to purchase an annuity by age 75
The proposals aim to sweep away most of these restrictions.Annuities will still be available but won’t be compulsory at age 75. USP’s will be relaxed so that the amount of drawdown will be at the members choice subject only to a cap and members may choose not to drawdown anything at all.The Government will also create additional flexibility for individuals who wish to draw down more than the capped annual limit.
Under this flexible drawdown model, individuals will be able to draw down unlimited amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. This ‘Minimum Income Guarantee’ will be the most interesting (and potentially most controversial) thing to define and should make for quite a debate in the pension world. So far, commentators are quietly impressed but this could change as we all begin to absorb the consequences and potential in this change. As ever, watch this space!
Jennie advises large multi-employer schemes as well as smaller single employer arrangements and has wide experience of both Defined Contribution and Defined Benefit schemes. Jennie qualified in 1986 originally as a criminal prosecutor. She sits as a Magistrate in her local justice area and is an Approved Chairman and Deputy Chair of the Bench Training and Development Committee. Jennie was formerly Legal Director of the Occupational Pensions Regulatory Authority. When her busy practice allows, Jennie likes to indulge her passion for travelling. To consult Jennie on any corporate Pensions matter, please call her on +44 (0)20 7749 2700 or send her an email by clicking below: