By TIM STALKARTT 23/06/2010
Despite the bias to gloom in today's budget, there is at least something for pension savers to cheer about. The Chancellor has announced the removal of the effective obligation to purchase an annuity by age 75. Further details will follow a consultation period, but the news is very encouraging and appears to be offering individuals the choice over what they do with their lifetime savings rather than force their hand at an arbitrary age of 75.
Pensions - age 75 rule changes
For those reaching 75 on or after 22 June, income drawdown has been extended to age 77 as an interim measure whilst the government consults on ending effective compulsory annuitisation at age 75. Affected individuals will benefit from reduced tax rates on death of up to 35% rather than 82% before age 77- a key change. New rules will be introduced from April 2011.
We welcome this interim change and look forward to more flexible and progressive pension regime. Those approaching age 75 can now keep their options open at least until permanent legislation is in force but must take tax free cash before age 75.
Pensions – Tax relief
The government will review planned changes to restrict relief for those with incomes above £150,000 from April 2011. Whilst they wish to protect tax revenues, this could be achieved by restricting tax relief by reducing the annual allowance for all. A figure of £30,000 to £45,000 has been quoted.
We would encourage the government to simplify pension rules and maintain a stable framework to encourage pension saving. For those able to pay higher contributions, it would seem sensible to contribute this tax year.
Pensions –State pensions
The government will review when the State pension age will increase to 66 and will consult on how quickly to phase out the default retirement age from April 2011.
The basic State pension will also increase by the higher of national average earnings, 2.5% and CPI from April 2011.
From a planning perspective, you may need to wait a further year before the State pension is paid (depending on when you were born) but, once in payment, the purchasing power will be maintained. This reinforces the need to save for retirement and not rely upon the State.
Personal tax
There were very few changes in this area. The personal allowance for under 65s will be increased by £1,000 to £7,475 in 2011/12, but the level of the basic rate limit will be reduced (by an amount expected to be £2,500) and the higher rate threshold will also be reduced (by £1,650).
The statutory tax incentives provided to individuals through investment in commercial property (Enterprise Zones and Business Premises Renovations) continue to be available and will be useful tools in helping taxpayers legitimately reduce their taxable income levels, thus potentially reducing the marginal tax rate and enabling the recovery of personal allowances for higher earners. Read more on Business Premises Renovations Allowance.
More aggressive tax planning schemes may be affected by future legislation in 2011/12. As already announced, anti-avoidance rules will be introduced to deny perceived tax abuse through the use of employee benefit trusts (including EFRBS) and there will also be a review into the UK taxation of non-domiciled individuals. Further, a review into the relative merits of a general anti-avoidance rule (GAAR) has now been announced.
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