Contributed by ACCA, in their own words
Individuals will benefit from changes to withdrawals from registered pension schemes. Saving was a theme of this Budget and the reform of pensions was a headline measure.
A number of changes are being made affecting individuals and the benefits that can be taken from registered pension schemes, covering the following:
- capped drawdown
- flexible drawdown
- trivial commutation
- small pots
- lump sum withdrawals.
There is currently a limit on the amount of drawdown pension that the pensioner may withdraw during a drawdown pension year. The current limit is 120% of a value called the ‘basis amount’. A drawdown pension year is the period of 12 months starting on the anniversary of when the individual first became entitled to the drawdown pension. This basis amount is also commonly referred to as the amount of an ‘equivalent annuity’.
The Budget increases the maximum income that a drawdown pensioner (member or dependant) with a capped drawdown pension fund can choose to receive to 150% of the ‘basis amount’ and applies for all drawdown pension years starting on or after 27 March 2014.
This allows individuals, where they meet certain conditions, to withdraw from their pension savings. There is no limit on the amount that they can take each year as drawdown pension. One of the required conditions is that the individual is receiving relevant income of £20,000 or more.
The Budget reduces the minimum income threshold for flexible drawdown to £12,000 and applies to all individuals who apply for flexible access to their drawdown pension on or after 27 March 2014.
A trivial commutation lump sum can be paid when the member is 60 or over and the total value of their pension rights under all registered pension schemes is less than the commutation limit; the lump sum extinguishes all the rights the member has under the scheme. The current commutation limit is £18,000.
The Budget allows members over 60 with total pension savings of £30,000 or under to take out all savings as one or more trivial commutation lump sums. The rise in the limit applies to all commutation periods starting on or after 27 March 2014.
Currently, a lump sum up to £18,000 can be paid where, due to the fact that the lump sum would not extinguish all rights under the scheme because of an annuity in payment, it could have been paid as a trivial commutation lump sum.
A lump sum can currently be paid only where the pension scheme is neither an occupational pension scheme nor a public sector pension, and where the member has not previously received more than one lump sum under this regulation.
Currently, members with transitionally protected rights to receive a tax-free pension commencement lump sum worth more than 25% of their total rights, who exercise that right, may also receive the balance of their fund to be paid as a taxed lump sum if it is worth £2,000 or less.
The Budget increased the limit of £18,000 referred to above to £30,000, and the £2,000 limit referred to above to £10,000. Also, the number of pension pots of below £10,000 that can be taken as a lump sum is increased from two to three.
The rise in the amount that can be taken as a taxed lump sum from other small pension pots, and the number that can be taken, applies to all payments made on or after 27 March 2014.
Lump sum withdrawals
When a member of a pension scheme starts to draw benefits from that scheme they can currently take up to 25% of the value tax free; this has not changed.
Currently, people who choose to withdraw all of their defined contribution pension savings at the point of retirement are charged 55% on the amount withdrawn (other than the 25% tax-free amount).
From April 2015 an individual will be able to withdraw their savings at a time of their choosing subject to their marginal rate of income tax, which for a basic-rate taxpayer will be 20%.
Pensions’ consultation: freedom and choice
On 19 March 2014 the government issued a consultation entitled ‘Freedom and Choice in Pensions’.
One of the issues raised in the consultation relates to ‘social care funding’. The financial services industry already supports people to pay for their social care costs through products such as care annuities.
The government expects that the proposed changes to the tax rules from April 2015 will allow the industry much greater flexibility to develop new products which meet people’s social care needs and is keen to hear from respondents about how the new tax rules could be designed to allow this.
Steps have been announced in the Budget to prevent pension liberation and preserve pension savings.
HMRC is committed to combating pension liberation activity and steps have been announced in the Budget to prevent pension liberation and preserve pension savings.
A number of promoters have set up schemes intended to allow individuals to access some, or all, of their pension benefits before age 55. To do this, they normally try to register a new pension scheme or use an existing registered pension scheme which the member is encouraged to transfer their pension fund to before it is passed to the member usually in the form of a loan which will be treated as an unauthorised payment. This is commonly known as ‘pension liberation’ and in many cases the member is left with little or no money after any fees have been deducted in addition to the tax charges due.
From 20 March 2014 HMRC will have new powers in order to help it decide whether or not to register a pension scheme. There will be new penalties for providing false information or a false declaration in connection with a registration application. A surrender of pension rights to fund an authorised surplus payment will be an unauthorised payment. A surrender of rights in favour of dependants will be treated as an unauthorised payment except where the dependants’ newly-acquired rights are provided under the same pension scheme.
Further measures will be introduced from 1 September 2014 to ensure scheme administrators of a registered pension scheme are fit and proper persons. HMRC will have new powers including the ability to de-register a pension scheme where it appears that the scheme administrator is not a fit and proper person.
Free advice, at a cost, from 2015 for defined contribution pensions
Government to introduce new guarantee offering free and impartial guidance on pension choices at the point of retirement.
Under the pension reforms individuals who retire will receive advice from an IFA. However, the pension schemes and individuals – via their pension pot – will pay for this increased cost.
From April 2015 the government will introduce a new guarantee that everyone who retires with a defined contribution pension will be offered free and impartial face-to-face guidance on their choices at the point of retirement.
To deliver this, the government will introduce a new duty on pension providers and trust-based pension schemes to offer this guidance guarantee. The government will make available up to £20m over the next two years to develop this initiative.