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!

Right, as we are still (as of 5th May) deep into election territory, this weeks little homily is again covering some real law.

This one comes courtesy of the First Tier Tax Tribunal and concerns the case of Fryer and Ors v HMRC and which seems to be saying that if you don’t take your pension when it is due to you, then you (or your estate) will be liable to Inheritence Tax – a situation that most practioners thought the tax man wouldn’t claim.

The facts simply put are that Ms Fryer had set up a discretionary trust into which all the benefits of her pension scheme were to be paid. The scheme allowed her to take her benefits at any time between the ages of 50 and 75 – a very common situation (although since 6 April 2010 the minimum age has risen to 55). If she died before taking her benefits, all the monies passed into the trust.

Sadly for Ms F, she died aged 61 without having put her pension scheme benefits into payment. HMRC argued that since her normal retirement date under the Plan was 60 the benefits ‘vested’ for tax purposes at that age and thus became liable to IHT from that time. The problem was that since the early 1990’s HMRC had made a statement that it wouldn’t seek to apply IHT on the overwhelming majority of deferred pension funds and in particular where the member survived for at least 2 years after the decision to defer.

But now the goalposts seem to have moved to cover all instances where someone could take their pension benefits but for whatever reason, chooses not to as HMRC now views this as an attempt to ‘deliberately’ avoid taking benefits and thus being in receipt of income which would otherwise be taxed. A mere omission to take a decision has become deliberate tax avoidance.

This could have wide implications for those who may have chosen not to take their benefits at the NRD of their scheme and will be yet another nail in the coffin of pension provision just at the very time when we should be encouraging saving.

If someone was in the lucky position not to have to call on their pension benefits to live and so put off the fateful day, only to die before doing so, it seems somewhat rough justice that executors may now face a hefty tax bill as a consequence, and even penalties for underpayment of something they didn’t realise was payable.

This decision may be appealed of course and I for one sincerely hope it is.