FOR PROFESSIONAL ADVISERS ONLY

Removal of age 75 rule

Since 6 April 2011 members of registered pension schemes no longer have to secure an income, usually by buying an annuity, by age 75.
Key points
  • USP called 'drawdown pension'.
  • ASP abolished.
  • Maximum income 150% of GAD rate on or after 27 March 2014.
  • Reviews for drawdown customers under age 75 every three years.
  • Tax charge on death up from 35% to 55%.
  • Minimum income requirement for flexible drawdown of £12,000.
  • No further contributions allowed for customers who use flexible drawdown.
  • Still no tax relief on contributions after age 75.

The changes

The term unsecured pension (USP) has been replaced with 'drawdown pension'. Alternatively Secured Pension (ASP) has been abolished for new and existing pensioners. There are now two types of drawdown pension; capped and flexible. Both are available from age 55 or earlier if the customer has a protected pension age and there is no upper age.

Capped drawdown

Capped drawdown effectively replaces what we used to know as USP and ASP. Members no longer have to crystallise their pension savings at age 75. There is no minimum income after age 75 which is consistent with the current approach before age 75.

Details of how the maximum income is calculated and how often income needs to be reviewed can be found in our article Income drawdown and review dates.

Flexible drawdown

Flexible drawdown allows those who meet a minimum income requirement (MIR) to take income without limit from their pension savings.

The MIR is set as relevant income of at least £12,000 each year, which is referred to as the minimum income threshold.

The minimum income threshold was £20,000, but reduced to £12,000 on the 27th of March 2014. What counts as relevant income to meet the MIR has been defined as:

  • A scheme pension or dependant's scheme pension from a scheme with at least 20 members.
  • A lifetime annuity or dependant's lifetime annuity.
  • Payments from an overseas scheme which if the scheme were a non-UK scheme would fall within bullets 1 and 2.
  • Some payments that are received from the State. These are defined as any pension, benefit or allowance under section 577 of the Income Tax (Earnings and Pensions) Act 2003. This includes the state pension, graduated retirement benefit, industrial death benefit, widowed mother's allowance, widowed parent's allowance and widow's pension.
  • Certain payments made by the Financial Assistance Scheme (FAS) which are payable until the member's death

Drawdown income as a member or as a dependant payable in the UK or from an overseas scheme doesn't count towards the MIR.

Note that only income already in payment can count towards the MIR.

Income taken using flexible drawdown will be taxed at a member's marginal rate of tax.

No further pension saving is allowed for those using flexible drawdown. Members have to stop being an active member of any defined benefit or cash balance arrangement before using flexible drawdown. For defined contribution arrangements no contributions can be paid by or on behalf of the member in the tax year flexible drawdown is taken. For future years it is not possible to contribute any money tax efficiently. Basically, the annual allowance charge will apply to the value of all new pension saving after flexible drawdown has been used.

Once an individual passes the initial MIR assessment, they can continue to use flexible drawdown while they have funds available. This means that the MIR, once agreed, doesn't need to be checked again.

Those who use flexible drawdown while resident abroad will be taxed on all withdrawals if they return to the UK within five tax years.

Pension providers will need a signed and dated declaration from members that they satisfy the minimum income requirement before allowing flexible drawdown.

Tax on lump sum death benefit

The tax charge payable where a lump sum is taken on death for drawdown customers who are under age 75 changes to 55% from 35%. This applies to all deaths on or after 6 April 2011. The 55% charge also applies to crystallised and un-crystallised money on death on or after age 75. This means that lump sums on death can be paid to beneficiaries on death at age 75 or later. Before 6 April 2011, on death after age 75 the only authorised lump sums that could be paid were those to charity.

There continues to be no tax charge on death where pension savings are used to provide pension benefits to dependants. The option to pass on savings tax-free to charity where there are no living dependants continues to be available and is extended to those under age 75.

Lump sums

Tax-free cash, triviality lumps sums, wind-up lump sums, annuity protection lump sum death benefits and pension protected lump sum death benefits can be paid after age 75. Serious ill-health lumps sums taxed at 55% can be paid for over 75s.

Contributions after age 75

As now, no tax relief is available on any contributions paid after age 75.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

In addition, the information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.

Published 24 January 2011

Updated 28 March 2014.

Last updated: 06 Nov 2014