Making Pensions More Flexible

Making Pensions more flexible

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Making Pensions more flexible

Flexible PensionsThe new Conservative government published their Finance Act legislation on 9 December 2010 which has outlined plans for a host of changes designed to make pensions less rigid.

The following information will tell you about the major changes which are likely to come into effect on 6 April 2011. As it is a draft legislation, there is every chance that it will change once again so the following information should not be taken as advice.

What’s Going On
In 1976, all pension holders were required to set up their benefits by the age of 75 but the new draft legislation aims to put a halt to the age limit. It is likely that most people still want to have a secured income when they retire but now you can take greater control over investments. This lack of rigidity is designed to make pension saving more appealing.

No Age Limit
Up until this year, retirees had to move their money into an Alternatively Secured Pension (ASP) or purchase an annuity by the age of 75.

The new legislation means that you can leave your pension alone. Those with enough income to live on can allow their pension to continue growing free from capital gains and income tax. The 25% tax-free cash option is still available whenever you want it with the rest available in the form of taxable income. You can also still purchase annuities in the traditional manner. If you have not taken your benefits by the age of 75, the death benefits change.

Death Benefits
If you die after the age of 75 or else when your pension fund is in either drawdown form, the remaining value of your fund will be available to a dependent or spouse in the form of taxable income. There is also the option to give it to a beneficiary in the form of a lump sum but a whopping 55% tax charge applies. Incidentally, there is no tax charge should you donate the money to charity. Previously, lump sums paid after the age of 75 were subject to a whopping 82% tax charge.

If you are in drawdown before your reach 75, the beneficiary will suffer from a higher tax charge. However, this tax charge is massively decreased should you die after the age of 75. The 55% tax charge will apply after your death if it occurs after you turn 75 regardless of whether you are in drawdown or have purchased an annuity.

No Time Limit On Income Drawdown
You are no longer forced to take money from a pension and you can utilise income drawdown for as long as you wish. However, there is still the 55% charge on death benefit lump sum payments as the government seeks to halt retirees using this option to avoid paying inheritance tax. Alternatively Secured Pensions are to be scrapped under the new laws.

This means you can now remain in income drawdown after the age of 75 and receive the same benefits as you are entitled to before 75. You can now avoid drawing income altogether until any age.