Changes to pension rules at 75

From next April you'll have greater freedom over what to do with your pension at age 75 if you haven't already bought an annuity. Should you be bothered?.

Today's draft 2011 Finance Bill lays out some of the changes we can expect to financial rules and regulations from April next year. On the whole it's a pretty dull affair, but there are proposed changes to pensions that might affect some of you.

The main change concerns not having to buy an annuity with your pension fund at age 75.

Don't existing rules allow you to avoid buying an annuity with your pension at 75?

Yes they do, via what's called an Alternatively Secured Pension (ASP). Instead of buying an annuity at age 75 you can instead draw an income from your pension fund, provided it's between 55% - 90% of an equivalent annuity (well, approximate annuity value based on a Government calculation).

In the unlikely event there's still money left in your pension pot when you die it can be used to provide income for financial dependents, or passed as a lump sum to beneficiaries (although taxes of 82% could apply to the latter - a 70% pension 'charge' followed by 40% inheritance tax).

So how are the new rules different?

While broadly similar, they provide a bit more flexibility. There'll no longer be a minimum withdrawal limit from 75. And no maximum limit either provided you receive at least £20,000 annual income for life (via state and other pensions), else withdrawals will be limited to an equivalent annuity (to reduce the risk of your pension fund running dry before you die).

If you pass any remaining pension fund as a lump sum to beneficiaries on your death inheritance tax will no longer apply and the 70% pension charge will be reduced to 55%. While 55% tax is obviously better than 82%, it's still a hefty disincentive to pass your pension onto future generations.

What if I start taking my pension before 75?

Then it's business as usual. You can either buy an annuity or draw an income of between 0-120% of an equivalent annuity. If you're drawing income then the new rules will kick in when you reach 75.

The only change is that if you die before 75 having drawn an income then any lump-sum passed to beneficiaries will be taxed 55% and not the current 35%.

To what extent will these changes affect me?

Unless you're rather wealthy then probably not much - most of us will not be able to afford the luxury of passing a pension fund onto beneficiaries rather than living off it throughout retirement. However, if you prefer the idea of leaving your pension invested and drawing an income instead of swapping the fund for an income for life (by buying an annuity) then these new rules will provide a bit more flexibility from age 75.

Any other changes of note?

Just re-confirmation that the annual allowance for tax relief on pension contributions will fall from £255,000 to £50,000 from 6 April 2011 and that the pension lifetime allowance will fall from £1.8 million to £1.5 million from 6 April 2012.

Oh...and the taxman will get more clout when requesting data from third parties - worrying given the public sector track record on data security and if you're evading tax.

Read this article at http://www.candidmoney.com/articles/article179.aspx