Pension Simplification – A Day

Pension Simplification was the term given to the governments attempt on 6th April 2006 to simply what was  a wide variety of different regimes surrounding occupational and, personal pensions, additional voluntary contributions and retirement annuity contracts (Section 226 contracts), in an attempt to make pensions easier to understand and therefore more attractive.

These changes covered all aspects of pension provision, including introducing new:

• Lifetime contribution allowances (LA) which was initially £1.5million pounds, now £1.6million pounds (2007/8), increasing by fixed amounts for the next 3 years and then annually thereafter.
• Rules on how this money can be invested.
• Minimum retirement ages.
• Death benefits and
• Rules on how the pension can be taken, which now includes Secured Pension, Unsecured Pension, Alternatively Secured Pension (ASP)

The following concentrates on how these changes affect how you can take your pension benefits and annuities in particular. It is based on our current understanding of rules , but please note the Government are still amending some rules and therefore this information may still be liable to change.

To see how simplification has changed the type of pension provsion you can now have, please click on the following link- New Pension Schemes.

Retirement Age

Pension Commencement Lump Sum

Secured Pension

Unsecured

Alternatively Secured Pension (ASP)

Triviality

Retirement Age

The normal retirement age, currently 50 – 75 will change to 55 – 75 with effect from the 6th April 2010 and will be known as the normal minimum pension age. This will be the case for all pension schemes, but as there is no prescription in the legislation (as at time of publication) as to how this needs to be implemented, occupational schemes may choose to phase in their early retirement ages from 2006, whereas personal pensions will probably wait until 2010 to implement any change upwards from the current 50. Those in special occupations with early retirement ages may have some form of transitional protection.

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Pension Commencement Lump Sum

In general the lump sum is usually 25% of the fund value or the capitalised value of the scheme pension (i.e. 5 x Scheme Pension) with an overall maximum of 25% of the lifetime allowance, which is £400,000 (2007/8). This level of cash is applicable to all types of registered pension arrangements including Retirement Annuities and also AVCs, FSAVCs, and Protected Rights (from Serps opt outs) which previously were not allowed to pay a lump sum, as long as the scheme changes its rules to reflect this. The only exception to this is that if you were already entitled to more than 25% (by 6/4/2006), when this can be protected post 6/4/2006.

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Types of Income available

Secured Pension

This type of income is a promise to pay a retirement income for the remainder of your life through a scheme pension or by means of a lifetime annuity. A scheme pension is where the original pension provider pays a retirement income. If you are in a final salary pension scheme also known as Defined Benefits scheme, this may be provided directly from the schemes assets or by the trustees buying an annuity. The benefits must pay an income (at least annually but can be more frequent) for life and may offer a minimum guarantee of up to 10 years but any balance of the guarantee period after the members death can only be paid as an income not as a tax free lump sum.

Should you be a member of defined contributions scheme, (also referred to as money purchase type schemes) if you take retirement before 75 you can be paid a scheme pension, a lifetime annuity, income withdrawal, with or without a short term annuity. However, just as now, you do not have to take either, from your own provider, as money purchase arrangements offer open market options. If you wish to retire after 75 unlike before, you are no longer forced to buy an annuity, but can be offered all of the same options as before 75 except that Income Withdrawal after 75 is called Alternatively Secured Pension, but the limits are less generous than Income Withdrawal before 75.

With regard to the lifetime annuity, as before you can select a guarantee period of up to 10 years and should be able to select from conventional annuities or with profit or unit linked annuities. One new development is that of a Capital Protected Annuity (also known as Value Protected Annuity). This allows any balance of the lump sum used to buy the annuity, minus income paid by time of death  to be returned on death , minus a 35% tax charge, providing death occurs before 75.  Whilst such schemes give greater reassurance to the annuitant, such protection may provide a lower income than conventional annuities.

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Unsecured Pension

This type of income is the new term for income drawdown before age 75, with the new option of short-term annuities.

All registered defined contribution pension arrangements (not defined benefits schemes) are now able to offer this if the provider or trustee agrees, This is similar to previous rules on Income Drawdown except that that the minimum income that can be taken is now nil and that the maximum income must be reviewed every 5 years, (currently every three years). The maximum income is 120% of the basis amount from the relevant GAD tables.

Short-term annuities can be purchased by part of the pension fund to provide an annuity for a limited period of time (maximum 5 years), whilst using Unsecured Pension but only up until age 75. The remaining fund remains invested under Unsecured Pension. The annuity payments must be within the limits as mentioned above. There are a few conditions to this type of annuity: it must be paid by an insurance company, the individual must have been given an open market option and the annuity payments may be level, increasing or linked to a relevant index.

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Alternatively Secured Pension (ASP)

Introduced to overcome the objections of having to buy an annuity at 75 under previous rules, an Alternatively Secured Pension is only available from 75, and is very similar to drawdown via unsecured pension. The main difference is that the income limit for ASP is now 90% (2007/8) of the basis amount from the relevant GAD table always using age 75. The minimum income is now 55% of the same figures. . Maximum income must be reviewed every year. As such, the term is misleading because the income is not secure and can vary depending on investment returns.

Due to the income restrictions, we feel this should only appeal to a small number of clients who have sufficient funds and other sources of income to take such risks with their income.

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Triviality

Since A-Day, (06/04/2006) triviality rules have changed as well. You now have the opportunity to commute the whole of your pension fund(s) as a lump sum with 25% being tax-free as long as the fund is within the new triviality limit. This limit will be 1% of the lifetime allowance - for example in the 2007/8 tax year, this is £16,000 (1% of £1.6 million).

In order for triviality to be available the following rules must apply:

• No previous trivial lump sum must have been paid within the last 12 months;
• All of the benefits under the scheme have to be taken at the same time;
• The total benefits value of the individual’s pension savings is not more than 1% of the Standard Lifetime Allowance  in force at that point e.g. £16,000 for the tax year 2007/08 tax year;
• The member has some Standard Lifetime Allowance available;
• The member is between ages 60 and 75;
• After the payment the member has no rights left in the scheme;
• 25% of lump sum will be tax-free, the balance will be taxed at the member's marginal rate.

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