In December 2010 the UK Treasury announced some quite dramatic pension reforms for pension savers. The most dramatic of all was the removal of the need to annuitise from April 2011, instead if income is not required then funds can remain invested in the accumulated pension. Previously pension savers had to annuitise by age seventy five or transfer into ASP (Alternatively Secured Pension).
Capped Drawdown introduced by the Treasury is a replacement for the USP (Unsecured Pension), which more commonly was known as income drawdown. Under Capped Drawdown investors can leave the pension fund invested and drawdown an income from the fund, the income will be capped at a maximum equivalent of a single life level annuity. This maximum income rate is a reduction on the previous income drawdown rules of one hundred and twenty percent of the single life level annuity and capped to prevent retirees exhausting pension savings and having to revert to state benefits.
Longevity in the UK is increasing and these radical reforms by the UK Treasury have been introduced to ensure that pension savings can last a lifetime and also to reduce the burden on the state in retirement.
At the same time the pension reform announced some changes to the death benefits of those that do not purchase an annuity. When an annuity is purchased the accumulated pension fund is exchanged for the annuity and if no additional death benefit options are selected then the pension fund is lost on death. The options available to prevent loss of the whole fund are: Spouses or partners continuing pension or a guarantee period of maximum ten years.
There is no such thing as a free lunch as most of us know and what the Treasury have done is change the death benefit tax on returning the pension fund to the estate from thirty five percent to fifty five percent.
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