Pensioners need £20K to access flexible drawdown; IFAs to incur training costs

Access to new flexible drawdown pensions will be restricted to people with a lifetime pension income of a minimum of £20,000 a year, the Treasury says.

The rule change is included in a package of draft clauses published today by the Treasury for inclusion in the Finance Bill 2011.

Capped drawdown amounts will be determined using GAD rates every three years until the end of the year the pensioner turns 75, after which the amounts will be reviewed annually.

The coalition has already removed the need to annuitise at age 75, putting in place an interim limit of age 77 for purchasing an annuity with a view to removing the limit altogether next year and allowing new forms of income drawdown.

Under today's proposals, this age 77 ceiling will be lifted entirely, allowing people with sufficient funds to continue in drawdown indefinitely.

The tax rate on lump sum death benefits will be 55%, apart from death benefits for those who die before age 75 without having taken a pension, which will remain tax free.

Inheritance tax will not typically apply to drawdown pension funds remaining under a registered pension scheme including when the individual dies before reaching age 75.

IHT anti-avoidance charges applying to registered pension schemes where the scheme member does not buy an annuity will be removed after April 2011.

IHT will still apply to all other lump sums, such as those in non-registered pension schemes.

The Treasury document says: "Since this measure increases the options open to individuals in retirement, more individuals may opt to seek financial advice as a result.

The knock-on effect could be more people seeking financial advice, the Treasury says, although advisers will incur initial training costs to ensure they understand the rule changes.

Total one-off compliance costs of meeting the changes across the pensions industry are expected to be around £18m.

The Treasury says: "Since this measure increases the options open to individuals in retirement, more individuals may opt to seek financial advice as a result.

"Such advice will incur a cost to the individual, although it is their choice, and many may have sought advice anyway."