Adviser > Technical Central > Information & guidance > Benefit options > Removal of age 75 rule
Removal of age 75 rule
Key points
- USP called ‘drawdown pension’.
- ASP abolished.
- Maximum income 100% of GAD rate.
- Reviews for drawdown customers under age 75 every three years.
- Tax charge on death up from 35% to 55%.
- Minimum income requirement for flexible drawdown of £20,000.
- No further contributions allowed for customers who use flexible drawdown.
- Still no tax relief on contributions after age 75.
Since 6 April 2011 members of registered pension schemes no longer have to secure an income, usually by buying an annuity, by age 75.
The changes
The term unsecured pension (USP) has been replaced with ‘drawdown pension’. Alternatively Secured Pension (ASP) has been abolished for new and existing pensioners. There are now two types of drawdown pension; capped and flexible. Both are available from age 55 or earlier if the customer has a protected pension age and there is no upper age.
Capped drawdown
Capped drawdown effectively replaces what we used to know as USP and ASP. Members no longer have to crystallise their pension savings at age 75. There is no minimum income after age 75 which is consistent with the current approach before age 75.
Maximum income is calculated as 100% of the comparable annuity at all ages, as opposed to the 120% that was used before 6 April 2011. The Government Actuary’s Department (GAD) has issued revised tables that extend beyond age 75.
Reviews of maximum income are now required every three years (as opposed to every five years) if the member is under age 75, and every year for those who are age 75 or over. Transitional rules mean that reviews will have to take place using the new drawdown limits at the earliest of the following events post 5 April 2011:
- The fifth anniversary of the most recent review date.
- Following a 75th birthday the next anniversary of the most recent review date.
- Following a transfer to another drawdown provider the next anniversary of the most recent review date.
This means that the 100% limit now applies to members who were in ASP before 6 April 2011 from their first review date after 6 April 2011. These members can stop taking an income from this date if they want to.
For members whose 75th birthday was between 22 June 2010 and 5 April 2011 the change takes effect from the start of the next drawdown pension year to begin on or after 6 April 2011. This is because these customers did not have to take benefits at age 75 and were subject to the interim rules allowing benefits to be left to age 77.
Members reaching age 75 can align the review dates of multiple drawdown plans that are under the same scheme so that the income limits are calculated annually on the same date.
Flexible drawdown
Flexible drawdown allows those who meet a minimum income requirement (MIR) to take income without limit from their pension savings. The MIR is initially set as relevant income of at least £20,000 each year, which is referred to as the minimum income threshold. What counts as relevant income to meet the MIR has been defined as:
- A scheme pension or dependant’s scheme pension from a scheme with at least 20 members.
- A lifetime annuity or dependant’s lifetime annuity.
- Payments from an overseas scheme which if the scheme were a non-UK scheme would fall within bullets 1 and 2.
- Some payments that are received from the State. These are defined as any pension, benefit or allowance under section 577 of the Income Tax (Earnings and Pensions) Act 2003. This includes the state pension, graduated retirement benefit, industrial death benefit, widowed mother’s allowance, widowed parent’s allowance and widow’s pension.
- Certain payments made by the Financial Assistance Scheme (FAS) which are payable until the member's death
Drawdown income as a member or as a dependant payable in the UK or from an overseas scheme doesn’t count towards the MIR.
Note that only income already in payment can count towards the MIR.
The minimum income threshold will be set by Treasury Order and is expected to be reviewed every five years.
Income taken using flexible drawdown will be taxed at a member's marginal rate of tax.
No further pension saving is allowed for those using flexible drawdown. Members have to stop being an active member of any defined benefit or cash balance arrangement before using flexible drawdown. For defined contribution arrangements no contributions can be paid by or on behalf of the member in the tax year flexible drawdown is taken. For future years it is not possible to contribute any money tax efficiently. Basically, the annual allowance charge will apply to the value of all new pension saving after flexible drawdown has been used.
Once an individual passes the initial MIR assessment, they can continue to use flexible drawdown while they have funds available. This means that the MIR, once agreed, doesn’t need to be checked again.
Those who use flexible drawdown while resident abroad will be taxed on all withdrawals if they return to the UK within five tax years.
Pension providers will need a signed and dated declaration from members that they satisfy the minimum income requirement before allowing flexible drawdown.
Tax on lump sum death benefit
The tax charge payable where a lump sum is taken on death for drawdown customers who are under age 75 changes to 55% from 35%. This applies to all deaths on or after 6 April 2011. The 55% charge also applies to crystallised and un-crystallised money on death on or after age 75. This means that lump sums on death can be paid to beneficiaries on death at age 75 or later. Before 6 April 2011, on death after age 75 the only authorised lump sums that could be paid were those to charity.
There continues to be no tax charge on death where pension savings are used to provide pension benefits to dependants. The option to pass on savings tax-free to charity where there are no living dependants continues to be available and is extended to those under age 75.
Lump sums
Tax-free cash, triviality lumps sums, wind-up lump sums, annuity protection lump sum death benefits and pension protected lump sum death benefits can be paid after age 75. Serious ill-health lumps sums taxed at 55% can be paid for over 75s.
Contributions after age 75
As now, no tax relief is available on any contributions paid after age 75.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
In addition, the information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Published 24 January 2011
Updated 10 April 2012
For professional advisers only
