Government to give new freedom of choice for serious savers
Posted on: February 17th, 2012
Categories: Financial Advice
Why does the Government treat pensioners like children? What do the suits in Whitehall think they know about how savers should spend their own money that the people who saved it in the first place don’t know?
These are urgent questions Mark Hoban, Financial Secretary to the Treasury, http://www.markhoban.com must answer if he remains adamant on defending new rules which are impoverishing tens of thousands of pensioners. Their predicament is all the more tantalising because they have the funds to pay for a comfortable old age – but, since April, the Government Actuary’s Department (GAD) http://www.gad.gov.uk/ has made it more difficult for them to get their hands on their own money.
Pension Changes
Complex changes to pensions rules have created a new way to avoid inheritance tax which experts describe as a “wheeze for the rich to beat IHT” while the squeezed middle suffer.
Most people outside final salary or defined contribution pensions will continue to buy an annuity – a form of guaranteed income for life – with most of their fund when they retire because of the security this provides. But a minority of pensioners choose to live off the income from the underlying fund, despite punitive taxes of up to 82pc which used to apply to the remainder of the fund if they died after the age of 75.
Since last April 2011, annuity purchase has no longer been compulsory at any age and the tax rate applied to income drawdown funds left unspent by pensioners who die at any age has been reduced to from 82 to 55pc. Great News!
The pensioners who are affected are those with income drawdown pensions, where savers set out to live off dividends from shares or other assets held in these schemes, rather than buying an annuity or guaranteed income for life. Instead of irrevocably giving away at least three quarters of their pension savings to an insurance company to buy that guaranteed income for life, they retain ownership of their capital in the hope of receiving better returns – albeit at much higher risk.
Instead of being allowed to draw income equal to a maximum of 120pc of what they could have expected from a conventional fixed annuity, the GAD has restricted this to 100pc since April. That may sound like a small difference but the impact on these pensioners’ income is dramatic because it multiplies the effect of falling annuity and gilt yields – which are both near historic lows.
Now there is a way of using the new rules to maximise the portion of pension savings which can be passed tax-free to heirs but which will only be useful to those with very substantial funds. People aged over 55 who can show they have a ‘secure income’ of at least £20,000 a year can do what they like with their pension fund under a new facility known as ‘flexible income’.
The idea behind the £20,000 threshold for flexible income is to ensure that these pensioners will never be entitled to means-tested State benefits, even if they blow the rest of their savings on wine, women and fast cars. Once pensioners have satisfied the £20,000 de minimis requirement, they can divide the rest of their pension fund into separate segments before drawing tax-free cash equal to 25pc of each segment to maximise income and minimise IHT liabilities.
Flexible drawdown was only introduced in April 2011, and is still fairly new, with a limited number of providers offering it. Wealthy individuals could consider using flexible drawdown as a way to deliver retirement income more efficiently from their unused pension savings, avoiding a potential 55pc tax liability.
While that compares unfavourably with IHT at 40pc on estates in excess of £325,000 per person or £650,000 per married couple or civil partnership, it still beats giving 100pc of the capital to a life company in return for an annuity if you want to pass assets to heirs.
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