Changes to SIPP drawdown....be aware!

HM Treasury responded to consultation on proposed amendments to retirement flexibility at the end of last year.

There are quite a number of amendments :

These new proposals are due to take effect from 6 April 2011:

- Unsecured Pension and Alternatively Secured Pension (ASP) will be replaced by a new system of ‘Capped Drawdown’.

- Maximum withdrawal will be based on 100% of GAD rather than 120% as current, and there will be a graduated move to the new levels for those already in drawdown.

- Reviews of income will be 3 yearly, or annually once aged 75.

- There will be a 55% tax charge on lump sum payments on death for funds in drawdown irrespective of age – rather than the 35% currently in place (albeit this level only applies pre age 75 at the moment).

- It will be possible to make a lump sum payment tax free to a charity – as is currently the case for those in ASP.

Rather more strikingly, ‘flexible drawdown’ will also be introduced:

- Where an individual can demonstrate that they have secured pensions of at least £20,000 p.a., known as the Minimum Income Requirement (MIR) from one or more sources, the cap on drawdown will be removed.

- This means an individual can draw as much pension as they wish from arrangements other than the MIR, until the fund is exhausted – subject, as normal, to income tax – although Protected Rights funds will be excluded from this.

- Only secure pension income (such as an annuity, occupational pension or state pension) will be considered in terms of the MIR.

- Individuals will not be able to accrue further tax relieved pension savings if in flexible drawdown.

As usual, advisers are presented with a number of matters to consider:

- Are there advantages to clients going into drawdown now so as to obtain the higher level of GAD available?

- Are all expressions of wish up to date – in particular, are there any clients who might wish to take advantage of the tax free charity payment on death?

- Some clients may suffer a drop in actual income (or an expectation of income) when the rates drop to 100% of GAD – do these clients require review and consultation?

- Some clients in drawdown may be considering a transfer to a new provider. Is it best to consider this sooner, rather than later, so as to retain the remainder of the 5 year period at the 120% GAD level?