Here's some questions that have been regularly asked since the pension flexibility changes were introduced on 6 April 2015. These FAQ are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.27 August 2015 Back to results
Can my client buy an annuity that's capable of being decreased at some point in the future?(Expand content) (Minimise content)
Yes. Up until 5 April 2015, an annuity was generally only allowed to remain level or increase throughout the period it was payable. Since 6 April 2015 it has been possible to buy an annuity where the annual amount payable decreases over time. This means that an annuity can now be set up with a higher initial rate that is then decreased to a lower level, for example, when the individual’s State Pension comes into payment. Starting to take an income from a ‘flexible’ lifetime annuity, that is one that can be decreased other than in prescribed circumstances, is a trigger event for the money purchase annual allowance. You can find more details on this here. Note, not all annuity providers sell annuities on this basis.
My client bought an annuity when he was 65 and it was guaranteed for 10 years. Unfortunately, he died just four years later. Can his widow take the remaining six years of instalments as a lump sum and, if so, will the lump sum be tax free?(Expand content) (Minimise content)
The commutation of the remaining instalments of annuity due under the guarantee period into a lump sum would only be possible if their value is not more than £30,000. Such a lump sum payment is a ‘trivial commutation lump sum death benefit’ under the tax rules, and it would be fully taxable under current legislation. If the remaining annuity instalments continued to be paid as income payments they would be tax free provided all of the following conditions were met, but would otherwise be taxed at the recipient’s marginal rate.
Guarantee payments of annuity are tax free if:
- the member in relation to whom they are being paid died before age 75 and on or after 3 December 2014, and
- no payment under the guarantee was paid before 6 April 2015.
My client is currently receiving an annuity, can they now cash it in for a lump sum?(Expand content) (Minimise content)
No, not at the moment. The government has said it wants existing annuity holders to have the freedom to sell their annuity income, and it consulted on the creation of a secondary annuity market in the first half of 2015. A copy of the government’s consultation paper can be found here(Opens new window).
In its Summer Budget statement on 8 July, the government indicated it will set out its plans for a secondary annuities market in autumn 2015. However, it has agreed with respondents to the consultation that implementation should be delayed until 2017 to ensure there’s a support package in place to aid consumers with their decision making.