Finance Act 2011 and the taxation of benefits from pension schemesMonday, July 25th, 2011
Changes are made to registered pension scheme legislation to remove the age 75 requirement for the taxation of benefits.
Section 65 and Schedule 16 of the newly enacted Finance Act 2011 make new provisions relating to the taxation of benefits available under pension schemes.
From 6 April 2011, the requirement to buy an annuity by the age of 75 is removed and individuals are able to leave their pension funds invested in a drawdown arrangement and make withdrawals throughout their retirement, subject to an annual cap. The maximum withdrawal on reaching minimum pension age is capped at 100% of the equivalent annuity that could have been bought with the fund value. This maximum capped amount 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 able to demonstrate that they have a secure pension income for life of at least £20,000 a year have full access to their drawdown funds without any annual cap. All withdrawals from drawdown funds are subject to tax as pension income.
Most of the rules preventing registered pension schemes from paying lump sum benefits after the member has reached the age of 75 are removed. The tax rate for all lump sum death benefits is 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.
In the case of the pension lump sum payments that must be taxed under PAYE, namely:
- trivial commutation lump sum payments
- winding-up lump sum payments
- exceptional lump sum payments treated as trivial commutation lump sum payments,
the restriction that the scheme member must not have reached age 75 is removed.