Take a more flexible approach to retirement

How the new rule changes could affect your future planning

As life expectancy rates in the UK continue to rise, the coalition Government estimates that nearly one in five people will live to see their 100th birthday. Radical legislation will attempt to ensure pension savings are sufficient for these retirees, which in turn will help reduce the burden on the state.

People are also increasingly taking a more flexible approach to retirement, often winding down rather than retiring on a specific fixed date. The new rules allow for that flexibility, enabling you to secure income from part of your pension while keeping the rest invested, for instance. If you are under 75 you are likely to be affected. Even people with some years to go until retirement have something to think about.

While the new rules make these retirement options possible, not all pension providers will necessarily offer all the options. Very few providers already have a drawdown option for traditional personal pension plans. Fewer still are expected to offer flexible drawdown. So these rule changes mean that now is an appropriate time to discuss your pension arrangements with us. On the right, we have provided a summary of the retirement rule changes.

New retirement rule changes from 6 April 2011

The maximum pension contribution limit is reduced to £50,000 from £255,000 annually. The balance of a notional £50,000 annual allowance from the previous three tax years can be carried forward, allowing for potential catch up in 2011/12.

The previous types of income-drawing arrangement have been abolished and replaced by the simple term ‘drawdown pension’, of which there are two types – capped and flexible.

To qualify for flexible drawdown, you must have a secure income stream already in payment of £20,000 per year or more.

Under capped drawdown, the maximum annual income is based on a Government Actuary Department (GAD) calculation of 100 per cent of the relevant annuity, instead of the previous 120 per cent.

Your GAD maximum will be reviewed every three years up to age 75 and annually thereafter.

Drawdown is available from age 55 (or earlier for those with a protected pension age) with no upper age restriction.

If you die after starting to draw an income from your pension, any remaining pension fund will be taxed at 55 per cent, regardless of your age.

Until age 75, there will be no tax charge on death for undrawn funds and a lump sum can be paid to your beneficiaries. After age 75, undrawn funds will be taxed at 55 per cent on death, but ring-fenced from the rest of your estate.

Defined benefits will be valued using a flat factor of 16.

The Lifetime Allowance will be reduced from £1.8m to £1.5m from April 2012.

Tax charges are applicable on funds in excess of the Lifetime Allowance.