Annuity Rule Changes – CII AF3, R04, J05
In our last four articles on the pension decumulation rule changes that came into force from 6 April 2015, we took a look at the new flexi-access drawdown and uncrystallised funds pension lump sum (UFPLS) retirement options, as well as the money purchase annual allowance, and the changes to the death benefit rules. In this article we will now take a look at how lifetime annuities have also changed as a result of the increase in pension flexibility at retirement.
Prior to April 2015, the main drawbacks of lifetime annuities were their inflexibility and the fact that once the annuity had been purchased, it was no longer possible to access the capital handed over to purchase the annuity.
Breathing new life into lifetime annuities
In order to address these issues and so to breathe new life into them, from April 2015, the government now allows the payments received from a lifetime annuity to go down (as well as up) by amounts in excess of those previously explicitly permitted under the pre-6 April 2015 rules. The government also now allows annuity contracts to stipulate at outset specific circumstances where the annuitant can exchange part of their annuity for a lump sum with the annuity provider.
Annuitant can sell his/her annuity in exchange for a lump sum
The government has also gone further and from April 2016 it will be possible for the annuitant to sell his or her annuity in exchange for a lump sum from a third party, subject to agreement from their annuity provider. The proceeds of the sale can then be taken directly or drawn down over a number of years and will be taxed at the individual’s marginal rate(s).
Also, prior to 6 April 2015 it was not possible to commute the income payments payable under a guarantee period for a lump-sum payment. However, from 6 April 2015 this is now possible for lifetime annuities (and scheme pensions), with a lump sum limit of £30,000 per scheme.
Rules relating to the maximum guarantee period have changed
The rules relating to the maximum guarantee period that can be offered by a lifetime annuity have also changed, and from 6 April 2015 there is no longer a maximum time limit on the guarantee period that the provider can offer. This however only applies to lifetime annuities set up on or after 6 April 2015, and not to those already in existence prior to that date. Transferring from a pre-6 April 2015 annuity into a new annuity won’t solve this issue for pre-6 April 2015 annuitants as annuity transfers now have to be on a like-for-like basis which wouldn’t be the case if the receiving annuity offered greater flexibility.
Where the income payments under an annuity guarantee period started on or after 6 April 2015, the tax treatment of the income received has also changed and is now as follows:
- Where the annuitant dies before age 75, any income received by the beneficiary is free of income tax.
- Where the annuitant dies aged 75 or over, any income received by the beneficiary is taxed as the beneficiary’s pension income under PAYE.
Scheme pensions however are still limited to ten years and the income paid from them will still be taxed as the beneficiary’s pension income irrespective of the age of the annuitant on death.
The rules surrounding an annuity protection lump sum death benefit have not changed since 6 April 2015, but the tax treatment has. The tax treatment for payments of a lump sum payable under annuity protection made on or after 6 April 2015 is as follows:
- Where the annuitant dies before age 75, the lump sum payment is not subject to tax as long as it is paid within the two-year window following their death. If the payment is made outside of the two-year window then a 45% tax charge will apply.
- Where the annuitant dies aged 75 or over, the lump sum payment is subject to a 45% tax charge.
The government has clearly thought long and hard about what needed to be done to lifetime annuities to breathe new life into them in the brave new world of pension flexibility – how successful this will be remains to be seen.
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Over to You…
What do you think of these changes regarding annuities? Are you keeping it all straight in your head or will they pose a challenge for you come exam time? We’d love to hear from you!