Annuitisation ruling simplifies minimum income calculations

The report, released today, formally answered industry concerns on its plan to end the existing obligation to purchase an annuity at age 75.

It set a minimum income requirement (MIR) of £20,000 for those seeking flexible drawdown from their pension pot, and allows level annuity income to count towards the MIR, rather than a more complex indexed model of minimum income.

But the government refused to sanction a delay to the reforms, saying to do so would create “further uncertainty” for providers to plan the arrangements, despite concerns suitable retirement products will not be ready for April 2011.

Answering concerns, the Treasury confirmed defined benefit (DB) income will be allowed to count towards the MIR. The government does not therefore expect movement of funds from DB to defined contribution (DC) to be a “popular route”.

Geoff Tresman, chairman of Punter Southall Financial Management, said the response to the consultation was “good news all around”, and had provided “peace of mind” to employers and trustees, as well as providers.

“What we have had over the past few years is a continual stripping down of all the attractive features of pension planning,” he said. "We now have a real simplification of the rules. I think it is very, very positive and will make the whole area more attractive.”

The government’s response also said schemes’ liabilities in the event of a false MIR declaration will be subject to extant “good faith” easements.

It reads: “Schemes will therefore not be liable for tax if the scheme administrator reasonably believed at the time of the payment that it was authorised.”

Duncan Brown, partner at PricewaterhouseCoopers, welcomed the simplicity of the proposals and said the changes would not be “burdensome” for trustees.

“It will be key to see what the draft regulations actually say, but the expression of intent not to put the trustees in the position where they are on risk because of false declarations made to them seem to be positive.”

Barry O’Dwyer, deputy chief executive of Prudential UK & Europe, welcomed the “pragmatic” consultation, but said customers expecting a range of flexible drawdown products will be disappointed come April.

He said: “We won’t be ready in April 2011. I suspect none of our major competitors will be ready either, it’s just too much work to do in too short a time.”

He also welcomed news providers and trustees will not be liable for false MIR declarations entered into in good faith, and the choice of level annuity income to contribute towards this declaration, rather than a more complex indexed model.

Other simplifications include the government’s choice not to calculate a combined MIR for couples, in its intention not to complicate the system.