The government has announced a further relaxation of pension rules, setting out the limited situations when people will avoid the requirement to ‘annuitise’ their pension pots by age 75.

The Finance Bill 2011 will introduce legislation enabling people with a defined contribution pension to defer indefinitely the decision to take benefits from their plan, and enable people with a lifetime pension income of £20,000 a year to access their drawdown pension funds without caps on the withdrawals they can make.

Investment and pension provider Standard Life said only a minority of people would be able to access the flexible drawdown of funds because only certain sources of income would count towards ‘lifetime pension income’ of £20,000 a year.

Andrew Tully, senior pensions policy manager at Standard Life, said: “Even those who do have sufficiently large funds will need to take great care when deciding whether or when to use flexible drawdown option, as any further contributions [to a pension] will be subject to a tax charge of between 40% and 50%.”

Michelle Mitchell, Age UK charity director, said: “Many people, particularly the relatively wealthy, will welcome proposals to liberalise the way in which they draw their pension savings. However we are extremely concerned about the very significant costs and risks involved with the government’s proposals to allow more people to draw income directly from their funds.”

Mitchell said the government and regulators needed to ensure anybody considering a different way of drawing their pension was fully informed of the potential risks, such as the value of investments falling and costs.

The Treasury said it estimated that 50,000 people currently in a drawdown arrangement with their pension fund could benefit from flexibility in how they drawdown funds.

“As well as those already in drawdown, the measure will also affect individuals who are not yet retired, or who have not yet applied all of their funds to providing a pension, and who may now choose not to buy an annuity,” the Treasury said.

Alternative income drawdown products may be accessed by those people.

Lifetime allowance tax change

On 9 December, the government confirmed that the lifetime annual allowance (LTA) for pensions would be reduced to £1.5million from 6 April 2012.

The Treasury said: “The individuals that will be affected to the largest degree from a decrease in the LTA are those that have accrued pension assets with more than £1.5million as they would need to stop contributing to their pension in order to avoid a tax charge.”

The LTA is the overall limit of pension savings that can be accumulated over someone’s lifetime without incurring tax. The income tax rate on the LTA is 25 per cent on anything above the LTA if taken as a pension, and 55 per cent on the excess if taken as a lump sum.

Anyone with a pension pot already over £1.5million or who expects their pension investment to increase above that level by 6 April 2012 without making further contributions can apply for a personalised LTA of £1.8million, if they cease accruing benefits in all registered pension schemes.

Other tax changes

The service provider Saga was critical of changes to the tax rate on ‘lump sum death benefits’ that will see it increase from 35 per cent to 55 per cent.

Saga director general Dr Ros Altmann said the change to the tax rate on drawdown funds passed on by those who die before age 75 was a large increase, affecting many middle class pension fund holders.

© Fair Investment Company Ltd