The LA is the maximum amount of money an individual is allowed to build up in pension savings over his or her lifetime. If the total capital value of those savings — which includes occupational pension schemes and any other form of pension — exceeds £1.8 million (tax year 2010/11) the balance will be subject to a ‘recovery’ charge when the individual retires. Her Majesty’s Revenue & Customs (HMRC) applies recovery charges on the grounds that any amount above the LA has benefited unduly from the tax advantages associated with pension savings. If the excess is taken as a lump sum, then a 55% charge applies: if it is used to provide pension income, a 25% charge applies. (N.B. From April 2012, the LA will be reduced to £1.5m.)

The Annual Allowance (AA)
The AA is the maximum amount an individual, or their employer, or both, is allowed to contribute to a pension (or pensions) and still claim tax relief on the contributions. For the tax year 2010/11, the AA is £255,000, reducing to £50,000 in tax year 2011/12. Although there is no limit on the amount that can be contributed to a pension scheme, there is a limit on the amount of tax relief that can be claimed each year. If the AA is exceeded, the excess may be subject to a tax charge, although the charge may be reduced or eliminated if an individual has unused allowances which can be carried forward from previous years and offset against the current year’s tax charge. The AA does not apply in the year of an individual’s death, where a person has 12 months or less to live, or the individual is a ‘deferred member’ and no longer building up benefits.

The increase is due to the combined performance of the company and its acquisitions to date. Analysts suggest that the trend will likely continue for the rest of the year and into 2012. Retirees recognised the importance of protecting them and their loved ones from harm.

People of all ages buy health and other insurance products to prevent poverty and hardship for everyone. Insurers encourage people to discuss their personal situation with them to help them provide individuals with the right products for them. Customer service contributed to the insurer’s success as they provided support for everyone who required their help.

Studies suggest that sales will likely increase in the long-term as the products are popular for both their national and international customers. Insurers will likely create new products to ensure that they meet customer demands now and in the future. These products will likely prove to be attractive as people consider that they are ideal for them.

Company profits will likely grow rapidly in the coming weeks and months as it focuses its attention on the international rather than the local market. Professionals consider that their overseas customers likely appreciate their dedication to providing quality products and services for everyone. This reputation will likely spread as the insurer explores new markets now and in the future. Future retirees will probably choose this insurer over others as the acquisitions have given it extra strength that they lack.

Income drawdown or ‘Unsecured Pensions’, became available in 1995. It allows people to take an income from their pension savings while still remaining invested and is an alternative to purchasing an annuity. You decide how much of your pension fund you want to move into drawdown and then you can normally take a 25 per cent tax-free lump sum and draw an income from the rest.

Pensioners funding their retirement through income drawdown are permitted to keep their pension funds invested beyond their normal retirement date. They continue to manage and control their pension fund and make the investment decisions. There is also the opportunity to increase or decrease the income taken as they get older. However, the fund may be depleted by excessive income withdrawals or poor investment performance.

From 6 April 2010 you are now able to choose to take an income from your pension fund from age 55. Tax rules allow you to withdraw anything from 0 per cent to 120 per cent (2010/11) of the relevant annuity you could have bought at outset. These limits are calculated by the Government Actuaries Department (GAD). These GAD rates are reviewed every 5 years.There’s no set minimum, which means that you could actually delay taking an income if you want to and simply take your tax-free cash lump sum. The amount of yearly income you take must be reviewed at least every five years.

From age 75, income drawdown is subject to different government limits and become known as Alternatively Secured Pensions (ASPs). If you’re already receiving income from an income drawdown plan, currently when you reach the age of 75 it will become an ASP. But you will still be able to receive a regular income while the rest of your fund remains invested. The minimum amount you can withdraw is 55 per cent (2010/11) of an amount calculated by applying the funds available to the GAD table, while the maximum is 90 per cent (2010/11). These limits must be reviewed and recalculated at the start of each pension year.

The government is currently consulting on changes to the rules on having to take a pension income by age 75 and, following a review conducted in June 2010, plans to abolish ASPs. Instead, income drawdown would continue for the whole of your retirement. The withdrawal limits are significantly less for ASPs, and the vast majority of people will be better off purchasing an annuity.

The new rules are likely to take effect from April 2011. If you reach 75 before April 2011 there are interim measures in place. Under the proposals, there will no longer be a requirement to take pension benefits by a specific age. Tax-free cash will still normally be available only when the pension fund is made available to provide an income, either by entering income drawdown or by setting up an annuity. Pension benefits are likely to be tested against the Lifetime Allowance at age 75.

Currently, on death in drawdown before age 75, there is a 35 per cent tax charge if benefits are paid out as a lump sum. On death in ASP, a lump sum payment is potentially subject to combined tax charges of up to 82 per cent. It is proposed that these tax charges will be replaced with a single tax charge of around 55 per cent for those in drawdown or those over 75 who have not taken their benefits.

If you die under the age of 75 before taking benefits, your pension can normally be paid to your beneficiaries as a lump sum, free of tax. This applies currently and under the new proposals.

For pensioners using drawdown as their main source of retirement income, the proposed rules would remain similar to those in existence now with a restricted maximum income. However, for pensioners who can prove they have a certain (currently unknown) level of secure pension income from other sources, there will potentially be a more flexible form of drawdown available that allows the investor to take unlimited withdrawals from the fund subject to income tax.

As a general rule, you should try to keep your withdrawals within the natural yields on your investments. This way you will not be eating into your capital.

Since 6 April 1996 it’s been possible for protected rights money to be included in an income drawdown plan, but before A-Day protected rights couldn’t be included in a phased income drawdown plan.

For investors who reached age 75 after 22 June 2010 but before the full changes are implemented, interim measures are in place that, broadly speaking, apply drawdown rules and not ASP rules after age 75. These interim measures are expected to cease when the full changes are implemented. Any tax-free cash must still normally be taken before age 75, although there will be no requirement to draw an income. In the event of death any remaining pension pot can be passed to a nominated beneficiary as a lump sum subject to a 35 per cent tax charge.

As with any investment you need to be mindful of the fact that, when utilising income drawdown, your fund could be significantly, if not completely, eroded in adverse market conditions or if you make poor investment decisions. In the worst case scenario, this could leave you with no income during your retirement.

You also need to consider the implications of withdrawals, charges and inflation on your overall fund. Investors considering income drawdown should have a significantly more adventurous attitude to investment risk than someone buying a lifetime annuity.

In addition there is longevity to consider. No-one likes to give serious thought to the prospect of dying, but pensioners with a significant chance of passing away during the early years of their retirement may well fare better with an income drawdown plan, because it allows the pension assets to be passed on to dependants.

A spouse has a number of options when it comes to the remaining invested fund. The spouse can continue within income drawdown until they are 75 or until the time that their deceased spouse would have reached 75, whichever is the sooner. Any income received from this arrangement would be subject to income tax. By taking the fund as a lump sum, the spouse must pay a 35 per cent tax charge. In general, the residual fund is paid free of inheritance tax, although HM Revenue & Customs may apply this tax.

In December 2010 the UK government announced the removal of compulsory annuitisation from April 2011. This means that no longer will you have to buy an annuity by the age of 75, instead if you wish, and can afford to, you can leave your accumulated pension savings as they are.

A quick summary of the key points announced by the Treasury.

• Compulsory annuitisation at age 75 will end from April 6, 2011, when a new capped and flexible drawdown regime will come into force
• The cap on drawdown will be 100 per cent of the equivalent annuity
• The minimum income requirement for flexible drawdown will be £20,000 per year
• State pensions, defined-benefit schemes, scheme pensions and lifetime annuities will all count towards guaranteed lifetime income
• Death benefits will be subject to a 55 per cent lump sum tax charge

Here at incomedrawdown.org.uk we asked independent financial adviser, Matt Renier to comment on the key points announced by the treasury, Matt said, “I think these are very sensible proposals and will help many people have greater flexibility at retirement. Retirees that have the minimum income of £20,000 will certainly have greater flexibility in how much they can withdraw, however, they will be taxed on this income and with the highest marginal rate of tax being 50 percent this may not be as attractive as first thought”.

With the announcement of the new ‘Flexible Drawdown‘ retirement options announced by the Treasury recently, here at incomedrawdown.org.uk we have been asked many times, “what is the definition of MIR?”.

below is the definition of Minimum Income Requirement, MIR:

To access flexible drawdown the declaration made by the member or dependant in a tax year must be that his/her relevant income in that tax year is at least £20,000. Relevant income for this purpose includes the following:

· Scheme pension (including pension received as a dependant) from a registered pension scheme (RPS) or from a relevant non-UK scheme

· Lifetime annuity (including annuities received as a dependant) from a RPS or from a relevant non-UK scheme

· State pensions

In all cases the pension must be in payment. Drawdown pensions and purchase life annuities are not classed as relevant income.

The Treasury will review this limit at least every five years.

On 9th December 2010 the Treasury announced a new retirement framework that sees the arrival of Capped and Flexible drawdown, replacing the previous USP, unsecured pension, and ASP, alternatively secured pension, both more commonly known as income drawdown. Firstly Let us start with the difference between the two new Drawdown structures:

1. The ‘Capped Drawdown’ will operate in a similar way to current USP, other than it is clearly seen as vehicle to provide a sustainable income for life. 120% GAD maximum level income drawdown is replaced with a new maximum level equating to 100% of the prevailing annuity rate. Interestingly this will not be the providers own rate, or average of the top three as it is for Investment linked annuity but a new GAD rate.
2. The ‘Flexible Drawdown’ will allow the client to take as much from their fund as they wish, which will be subject to income tax, so long as a Minimum Income Requirement, MIR, has been met.

Managing Income Levels

Income levels will need to be reviewed every three years up to the age of 75 and then every year.

The Minimum Income Requirement

The MIR is being set at £20,000. This will include state pension benefits; final salary pensions; and level lifetime annuities. It will not allow purchase life annuities, or non-lifetime incomes to be taken into account. The limit will be reviewed by HM treasury at least every five years and changed at their discretion.  “The MIR is the same for all ages.” The MIR applies to each individual – no allowance for couples.
The £20,000 annual income does include the state pension, which we can state as £5,078 per annum, leaving an income requirement of £14,922. To achieve this on a typical annuity rate today would need a pension fund of approximately £230,000.

Death Benefits

Both of the new structures have a new tax treatment on death where the fund passes to the clients estate in the form of a lump sum. HM Treasury has stuck to its guns and maintained the 55% tax on the fund, on the premise that people with these funds will probably have had higher rate tax relief along the way.

On death it appears that the new options will be:

• Maintenance of the drawdown arrangement for the dependent
• Return of Fund with a 55% ‘Recovery Charge’ on funds held in drawdown
• Full Fund pass over for the provision of a dependents pension
• Return of Fund donation to charity with NO TAX

Under the proposed reforms, Inheritance Tax, (IHT), will not typically apply to lump sum death benefits after age 75.

Funds can still pass to a dependent free of this tax so long as the money is being used for the provision of income.
Most disconcerting is that death benefits for all pensions, where death occurs post 75, will be subject to the 55% tax charge. We can say this is better than before – because an annuity would have had to have been purchased, but still – this is a very high tax charge if you have never had higher rate tax relief. The justification for the rate in the response to the“ consultation is stated as:

“The recovery charge will only apply in cases where an individual has unused pension savings remaining upon death. Typically this will occur where that individual has been in a drawdown arrangement. While many individuals will move between different income bands over their working life, HMRC estimate that around 75% of individuals currently in drawdown will have received most of their tax relief at the higher rate.”

We expect this to be an issue that will receive further challenge, because for the ‘ordinary person’ the message must now be – Good news you don’t have to buy an annuity when you get to age 75, bad news is that if you die after 75 your beneficiaries can only have the money with a 55% tax charge!

Serious Ill Health Lump Sums

The proposals introduce the payment of a lump sum, equating to a return of Fund, when serious ill health is diagnosed. As with the Death Benefit scenario this benefit is subject to the recovery charge of 55% when the person is over 75 years old. Importantly this does not apply before 75.

Impact of Existing Plans

Existing arrangements will come under the new regime with effect from the 6th April 2011. The impact of the new ‘Capped Drawdown’ limits will affect existing arrangements in different ways depending upon when 75th birthday falls, so if it falls:

• On or after the 6th April 2011, the new limits apply from the start of their next reference period to begin on or after that date;
• Before 6th April 2011, from the start of the drawdown pension year in which the 6th April falls. (This is not likely to be a large number of people in our opinion). Except for those who
• Between 22nd June 2010 and 5th April 2011, the changes will have effect from the start of their next drawdown pension year to begin on or after 6th April 2011.

What you cannot do!

• • Have a flexible income drawdown and continue to get tax relief on pension contributions.
• • Claim tax relief on contributions made after your 75th Birthday.

Additional Issues Covered

• The Lifetime Allowance reduces to £1.5 million w.e.f 6th April 2010
• New Fixed Protection rules are introduced for individuals with funds already over £1.5m
• Carry Forward of unused allowances will be allowed from the previous year
• No tax relief will be granted for contributions made after 75th Birthday
• Trivial Pension limits remain at £18,000

Source: Retirement Partnership

From 6 April 2011 the requirement to secure a pension income by age 75 is being removed and this will be achieved through a number of changes:
• the ASP rules are being repealed for new and existing pensioners, so removing the effective requirement for pension savers to buy an annuity by the age of 75;
• the maximum income that an individual may withdraw from most drawdown pension funds will be capped at 100 per cent of the equivalent annuity (as defined above) but will apply for as long as an individual retains the fund. The minimum annual withdrawal amount from age 75 is abolished;
• the maximum capped amount that may be withdrawn will be determined at least every three years until the end of the year in which the member reaches the age of 75, after which reviews will be carried out annually;
• individuals with drawdown pensions who have a lifetime pension income of at least
£20,000 a year will be able to access the whole of their drawdown funds as pension income without a limit on annual withdrawal (subject to their provider offering flexible drawdown pensions); any new pension savings for an individual once a scheme has accepted an application to access the whole of their drawdown pension fund will be liable to the annual allowance charge on all pension input amounts;
• an individual making a withdrawal from a flexible drawdown pension fund during a period when they are resident outside the UK for a period of less than five full tax years will be liable for UK income tax on that withdrawal for the tax year in which they become UK resident again;
• most of the rules preventing registered pension schemes from paying lump sum benefits after the member has reached the age of 75 are being removed;
• the tax rate for all lump sum death benefits is to be set at 55 per cent, apart from death benefits for those who die before age 75 without having taken a pension, which will remain tax free; and
• unused drawdown pension funds of a member who dies with no living dependants may be donated tax free to a charity.

The changes above will also apply to members of non-UK pension schemes who have received either tax relief on contributions or funds transferred from registered pension schemes. The inheritance tax (IHT) changes proposed under this measure are as follows:
• with effect from 6 April 2011, IHT will not typically apply to drawdown pension funds remaining under a registered pension scheme, including when the individual dies after reaching the age of 75;
• with effect from 6 April 2011, IHT anti-avoidance charges that apply to registered pension schemes and Qualifying Non UK Pension (QNUP) Schemes where the scheme member omits to take their retirement entitlements (e.g. a failure to buy an annuity) will be removed;
Source: HM Treasury

New transitional rules were put in place from 22 April 2010 increasing the top end age to 77 from age 75. The bottom end range remains at age 55.

Income drawdown allows you to defer the purchase of an annuity and keep your fund invested. The maximum income that may be drawn is 120 per cent of the pension that could have been purchased, calculated using Government Actuary rates. There is no minimum income requirement and if you so wish you can take zero income. Either an annuity or Alternatively Secured Pension (ASP) must be selected at age 75.

Q: How could the new retirement rule changes affect me?
A: The government is currently consulting on changes to the rules on having to take a pension income by age 75. This may be important to you if you’re coming up to age 75, or if you’re deciding between an annuity or Income Drawdown. Under the proposals, there will no longer be a requirement to take pension benefits by a specific age. Tax-free cash will still normally only be available when the pension fund is made available to provide an income, either by entering Income Drawdown or by setting up an annuity. Pension benefits are likely to be tested against the Lifetime Allowance at age 75.

Income drawdown Government Actuaries Department GAD rate held at 3.5% for October, which is unchanged from the September figure.

Data from Retirement Partnership says this means for a man aged 60 with a £100,000 fund, the maximum income would be £6,840. For a 65 year old man with the same fund, the maximum would be £7,800.

For a woman aged 60 with £100,000 saved, the maximum would be £6,480, and for a woman at 65, the maximum would be £7,200.

Income drawdown allows retirees to take up to a maximum of 25% of their pension fund as tax free cash and the remaining invested fund can be drawdown down anything from 0% and 120% of the GAD rates.

GAD historic data

Looking at the GAD historic rates the two months of September and October have been the lowest since April 2009. You can check out the GAD historic data here. GAD historic data

The government has also indicated it is reviewing the UK pension system and income drawdown could be one of the areas that benefits from this review, with new products lined up to make income drawdown more flexible.

Income drawdown is set for a rise in popularity, with the latest news on annuity rates looking bleak for the future, income drawdown could get incredibly popular. There have already been some announcements regarding two new types of income drawdown:

• Capped drawdown
• Flexible drawdown

According to leading expert William Burrows:

Two new types of drawdown are to be introduced regardless of age

• Capped drawdown – available to everybody although the maximum income available will probably be lower than the current 120% of the GAD limit
• Flexible drawdown – provided a Minimum Income Requirement (MIR) is met there will be no limit on the income that can be taken

Currently income drawdown favours those with much larger funds and whilst this will probably be the same going forward it is thought that the new rules will also help those with smaller funds have greater flexibility.