Pensions - The New Regime - Spring 2004

01 April 2004

After a considerable wait, the Inland Revenue has published a consultation document alongside the Department of Work and Pensions' Green Paper proposing a single tax regime for pensions, as opposed to the eight currently in operation.

The intention is to achieve a transparent, consistent and flexible system, which can be easily understood. Despite the intention to have this in place by April 2005, it seems more likely that the changes will be implemented, should they be so, by April 2006.

So what are the main changes likely to be?

The maximum fund allowable will be £1.4 million, to increase by the Retail Price Index (RPI), not the Average Earnings Index (AEI) as many wanted. But individuals will be able to pay contributions of up to £200,000 in any one year (including employer contributions).

• Funds over this at retirement will become available as cash, but subject to a 55 percent tax charge.
• Likewise, if the surplus is taken as income, the income will also effectively be taxed at 55 percent.
• Minimum retirement age will rise to 55 by 2010.

Some options at retirement will also be changed, aimed at making more flexible the existing Income Drawdown options:

• For those not wishing to purchase an annuity before age 75 they may still draw down from their pension fund. After having taken a tax-free lump sum, a minimum £1 of the fund will need to be drawn per annum. The maximum that can be drawn is limited to 120 percent of the best single rate level annuity. This is more flexible than the current arrangements.
• A new option, Alternative Secured Income (ASI) will provide an alternative to compulsory purchase of an annuity at age 75, as is currently the case. Death benefits will be restricted however.

In all the changes are designed to make the taking of benefits in retirement more flexible. However, the Government looks to have bowed to pressure from the Inland Revenue, and has not lifted the age limit of 75 by which time you at present must buy an annuity. They have simply loosened the rules somewhat, by allowing a more restricted drawdown option.

The most controversial issue seems to be the maximum £1.4 million fund. This may affect more people than the Treasury would have us believe.

‹ Back

• © Furley Page LLP 2008
• | LLP
• | Terms and Conditions
• | Privacy Policy
• | Site Map
• | Accessibility