Compulsory Annuitisation to be Scrapped from 6 April 2011

Compulsory Annuitisation to be Scrapped from 6 April 2011

by Rebecca Hall on 14 Feb, 2011

In December 2010 the Government published new pension changes which scrap compulsory annuitisation. The changes will come into effect on the 6th of April 2011 and means that people will no longer be forced to buy an annuity at the age of 75. How the changes will affect people has yet to be seen. Some believe they will offer added flexibility whereas others believe people will be disadvantaged by the changes.

There are five main points to the changes:

•    Buying an annuity at the age of 75 will no longer be compulsory.
•    All existing arrangements will be replaced by a new ‘capped drawdown’, available from the age of 55.
•    The maximum income will be 100% of the equivalent annuity. This will be renewable every 3 years until the age of 75, and yearly from there on.
•    There will now be a recovery charge of 55% for lump sum death payments.
•    People will be able to withdraw more than the annual limit provided they meet a MIR (Minimum Income Requirement) of £20,00 a year.

This means that everybody will have to review their retirement plans once these changes come into effect. Anybody who is currently using, or is planning to use drawdown will be particularly affected.

If you have an unsecured pension (USP) then the new rules will only take effect on your next review date. Each person’s review date will be slightly different but it will likely fall on one of the following:

•    On the fifth anniversary of your most recent review.
•    The next anniversary of the most recent review following a 75th birthday.
•    The next anniversary of the most recent review following the transfer to another provider.

For those with an USP there can be different implications and opportunities.

If you request a review and your next pension anniversary is before the 6th of April 2011, then you will be able to keep the higher income limits currently in place (120% GAD) for a full five years instead of three. If you die after 6th April 2011, lump sum death benefits will then be subject to the higher tax charge of 55% recovery charge.

For those with an Alternatively Supplied Pension (ASP) the new rules will only take effect after your next review date. The implications and opportunities of this can be that the lump sum death benefits of death after 6th April 2011 will now be subject to what is a lower tax charge of 55% as well as there no longer being a requirement to take a minimum income.

If you are thinking about using a drawdown product then you should do so, if possible, before the 6th of April 2011 as you will get more flexibility in the level of income they can take and locks in this extra flexibility for five years.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.