News from the IPS Partnership
Tuesday 6 July 2010
Transitional Rules for Securing Pension Benefits at 77
Following the second Budget of 2010, the coalition Government announced "it will end the existing rules that create an effective obligation to purchase an annuity by age 75 from April 2011..". A consultation process will start on the changes but in the interim transitional rules will be introduced that will extend the age from 75 to 77 with effect from 22nd June 2010. In support of the recently published Finance Bill 2010 Technical Guidance has been issued, albeit in draft format with a caveat that it may need to be altered. We have already picked up on one error in Chapter 6, second paragraph, last sentence , and a second draft has been published.
Who do the new transitional rules apply to?
All pension scheme members and their dependants who are under the age of 75 on 21st June 2010 i.e. born on the 22nd June 1935 or later. They are either in receipt of a pension that is being paid by unsecured pension or have uncrystallised money purchase funds.
Do the transitional rules apply to death benefits?
Yes. Care needs to be taken here if a scheme member is not aged 75 on 22nd June 2010 who has a dependant aged at least 75 on 22nd June. On death on the member prior to attaining age 77, the dependant will have the choice of unsecured lump sum death benefit (less 35% tax) or a pension payable by annuity purchase or alternatively secured pension or scheme pension even if that dependant is under age 77 at the time of the member's death.
Are the Inheritance Tax Rules the same for pension death benefits?
Yes and No.
The inheritance tax (IHT) rules are still the same for alternatively secured pension. The IHT rules apply to all members in alternatively secured pension whether or not this was taken out at age 75 or 77. However, the IHT rule covering anti-avoidance still applies from age 75. So scheme members who intend to use the extension of unsecured pension to age 77 and set the income level at zero may still be assessed to the IHT under the anti-avoidance rule.
Do providers have to change their scheme rules to reflect the change?
No. The transitional rules will include statutory override thereby giving scheme trustees/managers discretion to apply this extension.
Will there be new GAD tables issued?
No. Calculating the income limits for someone aged 75 or over will be based on a 75 year old.
Can a Pension Commencement Lump Sum be claimed after age 75?
No. Current rules do not allow the payment of a pension commencement lump sum when a scheme member attains age 75 with uncrystallised funds. Scheme trustees or manager must crystallise these benefit into unsecured pension immediately before 75 and then alternatively secured pension. There is no option for payment of a pension commencement lump sum with the unsecured pension. The new regulations will give trustees/managers the option of a pension commencement lump sum.
Does the extension to age 77 apply to any other areas?
No.
a) Benefit Crystallisation Event 5a (second test against lifetime allowance of the unsecured fund) still applies at age 75.
b) Benefits must be taken before attaining age 75.
What next?
A consultation process will be introduced to determine the rules to apply from 2011/12 tax year. To quote from the Technical Guidance "Any member or dependant whose 75th birthday was before 22nd June 2010 and who is receiving an alternatively secured pension or a dependant's alternatively secured pension respectively remains subject to the same rules and limits as applied before the Budget announcement until at least 5th April 2011." It is expected that the changes to be introduced from 6th April 2011 will hopefully benefit more scheme members than those covered by the transitional rules. We will have to wait and see.
Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that The IPS Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue Customs practice are subject to change.