UK Pensions Schemes to Resist Income Withdrawal

21 February 2012 (PLANSPONSOREurope.com) -Most UK pension schemes are likely to resist introducing income withdrawal, according to law firm Norton Rose. 

Income withdrawal enables “money purchase arrangements”, including a money purchase arrangement in a defined benefit scheme.

As an alternative to an annuity, HM Revenue & Customs (HMRC) rules allow members to “designate” all or part of part of the assets of their money purchase arrangement as a “drawdown pension fund”. Members can then withdraw an income from that fund known as “income withdrawal”.

From 6 April 2011, there have been two types of income withdrawal. In addition to the existing type of “capped income withdrawal”, which was introduced under the Finance Act 2004, there is a new “flexible income withdrawal” with few restrictions. The main condition is that a member must satisfy the “minimum income requirement”.

Norton Rose says: “Introducing income withdrawal under a scheme would involve detailed rule amendments and more complicated administration, with the potential for error. There is also the possibility that members could be worse off than if they had bought an annuity.

“It is likely that the vast majority of schemes will decide not to introduce income withdrawal or to allow income withdrawal only where a member elects to transfer assets out of the scheme to an insurance contract (which might require a rule change).

“A defined contribution scheme which has higher earners could face pressure to allow income withdrawal. Similarly, a defined benefit scheme may have higher earners who wish to take additional voluntary contributions as income withdrawal. In those cases trustees may reach the conclusion that it is prudent to take steps to ensure that members are aware of the risks and to consider obtaining a signed discharge.”
 

PLANSPONSOREurope Staff
editors@plansponsoreurope.com