Pension simplification
You might be aware that there are some major changes happening
in the pension world at the moment, and although a lot of the legislation
is to do with funding levels of pensions, there are a lot of changes to how
benefits can be taken.
The new legislation came into force from the 6th April 2006 (known as A-day)
and so if you are nearing retirement you need to consider how these changes
may affect your benefits and your options. One of the major changes will affect
when you can retire. Currently, most pension benefits can come into payment
from age 50 (except for protected rights benefits). Under the new legislation
the government has confirmed that they are to raise the age for retirement
from 50 to 55 (there will be transitional arrangements for this change up
to 2010). Individuals with an existing contractual right to retire before
55 may continue to do so under transitional arrangements. Despite recent attempts
by the House of Lords to make amendments, benefits must come into payment
not later than age 75.
Another big change will affect those with protected rights who can now take
25% tax free cash from this fund. Another interesting change will affect those
who don't have large pension funds. If an individual's total pension savings
(including any pensions in payment) are valued at no more than 1% of the annual
lifetime allowance (£16,000 in 2007/08) then they will be able to take
all their fund as cash, subject to a tax charge on the excess over the tax
free cash entitlement.
From A-day the retirement options will be Secured Income, Unsecured Income
and Alternatively Secured Pension (ASP). Secured income is the income that
you derive from your pensions scheme or purchase of an annuity. Unsecured
Income is similar to Pension Fund Withdrawal option currently offered under
personal pensions as well as rolling 5 year annuities. ASP is available from
age 75 as a new concept aimed at individuals who choose not to participate
in the pooling effects of annuities. The Unsecured Income option has major
differences to pension fund withdrawal in as much as there is no need to take
a minimum income. The maximum income is determined with reference to new guidelines
which are prescribed by the Inland Revenue. Both Secured Income and Alternative
Secured Pension options must be taken out from age 75.
The new legislation offers more choice for individuals in retirement and it
is even more important that you seek advice on these options so that you can
appreciate the advantages and also be aware of the potential pitfalls that
might lie behind them. These include issues such as risk tolerance and investment
advice and also relate to the practicalities of needing on-going advice as
you go through retirement. The new rules will effectively allow draw-down
to continue after age 75 and this will be known as an "alternatively
secured pension" or ASP. ASP is similar to draw-down, but it has some
key differences. Firstly, ASP will be subject to annual review rather than
5 yearly review under drawdown. Secondly, ASP has a much lower upper limit
of maximum income in order to prevent the fund from exhausting too quickly.
Finally, nothing can be paid outside of the pension fund on death, unless
to a charity. Any remaining ASP fund must first be passed to a spouse or dependant
within the pension wrapper and the spouse or dependant can the use the funds
to buy an annuity, take unsecured income (if they are under 75) or take ASP
(if over 75).
As annuity rates have been depressed for some time, many people in retirement
want to avoid annuity purchase and many commentators have seen an opportunity
for IHT planning in relation to ASPs and there has been a great deal of speculation
about using ASP for IHT planning, especially in view of the fact that it is
virtually impossible now (after the recent rule changes) to move your property
outside of your estate. However, the Revenue and the government are resolute
in not wanting pensions to be used as an estate planning tool.
Using a SIPP allows the retiree, after death, to potentially transfer the
fund to any other pension members (ideally family members). ASPs were designed
to provide an alternative to annuitisation for those with religious objections
to risk-pooling not as an IHT planning vehicle. This statement has now clarified
the mounting speculation with regard to ASPs and IHT and it is clear that
those who use ASPs will now face IHT. ASP may be a valid choice for some people,
but there are many issues surrounding this new product.
A key factor must be the retiree's tolerance of risk and ability to understand
the risks as he or she goes forward into their 80s and 90s. Replacing security
for investment risk might not be the best choice, on a personal level for
elderly people, and annuities should continue to play an important part of
retirement planning. ASPs should not be considered by anyone with a small
pension fund or who does not have a considerable amount of other assets beside
their pensions.
