Compulsory purchase of annuities set to end
Wellden Turnbull accountants are warning that the rule which states anyone with a personal or company pension must buy an annuity by age 75 is set to be abolished by the government.
Robin John from Wellden Turnbull said “Currently, a maximum of 25 per cent of the pension pot can be taken as a lump sum, and the remainder must be used to purchase a fund which provides a guaranteed income”.
However, low returns on annuities coupled with the risk that most of an individual’s pension pot will effectively be lost if they die shortly after purchasing one, have made the rule unpopular with some people.
In response, the government announced in the Emergency Budget that it would be increasing the age limit to 77, but it has also launched a consultation document on scrapping the rule completely.
Under the new proposals, individuals would be given the option of taking their pension assets as a lump sum or using an ‘income drawdown’ option, on either a capped or a flexible basis depending on their income level.
Removing the age limit would also allow individuals to purchase an annuity at any time, so they could choose to do so when rates are more advantageous.
The government has also announced changes to the Inheritance Tax (IHT) rules surrounding pensions, which are currently subject to a 70 per cent unauthorised payment charge and IHT at 40 per cent on the remaining money.
From next April, any unused funds remaining when an individual dies will be taxed at a ‘recovery rate’ of 55 per cent, with no liability to IHT. If the individual dies before age 75, no tax will be levied.
Assuming the individual has taken a 25 per cent tax-free lump sum, the 55 per cent tax rate on the remainder is roughly equivalent to 40 per cent (the same as IHT) on the full amount. This will ensure individuals do not use the new pension rules as a means of avoiding IHT.
For further enquiries please call Katie Smith on Tel: 01932 584787 or email k.smith@wtca.co.uk