Compulsory Annuities to End in April 2011

The government has announced proposals that from April 2011 retirees will no longer be required to buy an annuity at age 75 with their pension pot. These proposals follow on from last month's Budget Statement which increased this age to 77 in anticipation of these proposals.

As the rules previously stood, anyone with a personal or company defined contribution pension was required to either purchase an annuity at age 75, or enter the highly punitive Alternatively Secured Pension "ASP" regime. Whilst an annuity would provide them with a guaranteed pension income for life, its forced purchase often resulted in individuals having to purchase their annuity when market rates were low, thereby reducing the level of pension income they could secure. The ASP alternative, introduced originally to placate religious objections to annuities, resulted in reduced pensions and a penal charge of approaching 90% being imposed on death.

Under the new proposals retirees will be able to choose from two options:

a capped scheme which will enable individuals to choose how much to draw down annually from their pension pot throughout their retirement, subject to a set limit;

a flexible option which will enable individuals to draw down unlimited amounts from their pension pot as long as they meet a minimum income level.

Furthermore, the plans will also see unused pension funds removed from inheritance tax charges, although any unused funds remaining upon death will be taxed at a proposed "recovery rate" of 55%, which is seen by the government as fair recompense for the significant tax reliefs, and is far more reasonable than the punitive rates of the ASP regime.

The government will be consulting with the pensions industry and professional advisers, particularly on the level of the annual drawdown limit under the capped option and to the minimum income requirement under the flexible option. They are determined to avoid people falling back on the state by burning through their pension pot too quickly.

At this early stage it appears that the government may be moving closer to the Canadian and Irish models where part of the pension pot is allocated to purchasing a basic level income, and the balance can be drawn down as required, which is highly preferable to the ludicrous system that has applied in the UK for so long.

Although the consultation indicates that inheritance tax will not apply to any unused pension funds, the government has stated that it intends to monitor the position to make sure that people do not accumulate large pension pots with a view to avoiding their inheritance tax liabilities.

The consultation period closes on 10 September, and the legislation is expected to come into force on 6 April 2011.

These are hugely important changes which, when allied to the proposal to replace the previous government's complex plans to deny tax relief at higher rates with an annual allowance in the order of £30,000-£40,000, are likely to re-invigorate the use of pensions by the business community. Further updates will be made on this matter when the consultation process is completed and firm proposals are issued.