Annuity rule axed

In another major pensions concession by the coalition Government, the requirement that pension savings must be 'secured' by the purchase of annuities is to be scrapped as from April 2011. Savers will be able to maintain their pension policies in force indefinitely and to draw an income from the investments equal to that which could have been obtained from an annuity.

This addresses the issue of unattractive annuity rates and the risk that sums applied to purchase annuities may be lost in the event of premature death. However, the 'income drawdown' alternative does expose savers to the vagaries of the stock market, and for this reason most people will continue to prefer the security of an annuity for at least part of their pension pot.

In the event of death while benefits are being drawn from a pension plan, the fund will be subject to a flat tax charge of 55% (compared with 82% after age 75 under the previous regime), and there will be no liability to inheritance tax. The 55% does not apply where the residual funds are used to purchase a dependent's income.

As a result of a further concession, those who secure a pension of at least £20,000 p.a. (for example via annuities or a final salary scheme or State benefits), will be permitted to withdraw the rest of their pension pots in cash, subject to their marginal rate of tax. This will make pensions a very valuable estate planning tool.