The Government Pension Rules Explained
From 6th April 2011 the new government pension rules will be effective. All UK citizens including the expatriates will be affected by the new government pension rules. Millions of people will enjoy the benefits of a more flexible pension scheme. On the other hand, they will also suffer at the same time as the tax rate on the death charges on the balance of their funds will increase from 35% to 55%. The new Finance Bill confirmed the Treasury’s pension proposals. Now let us see some of the things that will change in the new government pension rules. Drawdown and annuities According to the new government Pension Rules you will be able to postpone your pension drawing until you are 75 years of age. Before you turn to 77, you have to wither buy an annuity or shift to an Alternative Secured Pension or commonly known as ASP. An alternative system would be the “Flexible Drawdown”. A flexible drawdown gives you the opportunity to withdraw unlimited amount of income from your pension fund. However, according to the new government pension rules, you have to have a secured income of £20,000 per annum to qualify for that. So, only a few lucky ones can enjoy the benefits this. The MIR can only have pension income such as state pension, annuities, and scheme pensions like final salary schemes. It will not include incomes from drawdown or income from QROPS. Even if you have any significant investment somewhere else, income from those sources will not be counted towards MIR. Another thing to notice in the new government pension rules is that if you go for the flexible drawdown you will not get tax exempt on pension contributions anymore. There is a downside of these new government pension rules. The death charge on the total balance on your pension fund has been made 55% which was 35% previously. There had been some uproar about the penal tax rate. However, the government did not change it. As a result, according to the new government pension rules, your heirs will receive less than half of your pension fund. Although, if you do not withdraw or take any lump sum from your fund before you are 75, the whole fund will be passed to your heirs as a tax free lump sum. However, after 75, you will be taxed 55%. Lifetime allowance Currently, the pension savers have a lifetime allowance of £1.8 million. However, the treasury has confirmed that this amount will be reduced down to £1.5 million. If you have personal savings over £1.5 million or think that your pension fund will be worth more than that because of investment growth, you can apply to the HM Revenue and Customs for temporary payment of £1.8 million in the new government pension rules. Tax free lump sum Under the current government Pension Rules, you can take 25% pension commencement lump sum up to the age of 75 years. However, under the new rule, the age limit is removed. The treasury is still discussing whether to allow people PCLS before the age of 55. However, it is still not confirmed.
