April 2nd, 2014
George Osborne announced fundamental changes to the way individuals will be able to access their defined contribution pension saving. From April 2015 the Government proposes that people will be able to access their pension savings as they wish at retirement, subject to their marginal rate of tax. The Government has published a consultation that sets out these proposed radical reforms which they intend to take effect from April 2015. In the meantime, they have announced changes which will take effect from 27 March 2014 that will pave the way for the more radical reforms in April 2015.
From 27 March 2014 to apply until April 2015
Capped Drawdown limits
Legislation will be introduced in the Finance Bill 2014 to increase capped drawdown limits from 120% to 150% of the basis amount for drawdown pension years commencing on or after 27 March 2014. For example, if a member first became entitled to drawdown pension on 3 August 2013, the higher maximum drawdown pension of 150% of the basis amount would first be available on 3 August 2014.
The minimum income requirement, whereby an individual must have an amount of secure pension income to access flexible drawdown, is being reduced from £20,000 per year to £12,000 per year.
The triviality limit that allows individuals to take their pension savings as a trivial commutation lump sum will be increased from £18,000 to £30,000. This change will also apply to all registered pension schemes, whether defined contribution or defined benefit. Other small pension pots The limit on the amount that can be drawn from small pension pots in certain circumstances will increase from £2,000 to £10,000. This covers occupational schemes where the total value of all schemes related to the same employment does not exceed the £10,000. In addition, up to three personal pension pots can also be drawn in this manner, with the £10,000 limit applying to each individual pot. There are certain criteria that must still be met, such as the minimum age of 60 to use these facilities. These payments can be made in addition to the new triviality limit of £30,000.
From April 2015: the proposals
The Government wants to make the rules for accessing retirement savings under defined contribution schemes simpler and provide a greater amount of choice.
The proposal is to allow individuals to draw down their pension savings however they wish after the age of 55. They could, if they wish, withdraw the full amount. The amount they draw will be subject to their marginal rate of income tax.
Tax-free lump sum
Tax-free lump sums of 25% will continue to be available.
Lump sums on death
The 55% tax charge on certain lump sum death benefits will be reviewed. The Government believes that a flat rate of 55% will be too high, and will engage with stakeholders to review the rules to ensure that taxation of pensions on death is fair under the new system.
Tax rules on accumulation
There are no changes proposed to pensions tax relief during the accumulation phase. The government still believes that an annual allowance and lifetime allowance are the fairest way to restrict the total tax-privileged pension saving an individual can make. These are set to fall to £40,000 and £1.25m respectively on 6 April 2014.
Date from which benefits can be taken The government proposes to increase the normal minimum pension age (i.e. the earliest date benefits can normally be drawn), from 55 to 57 in 2028, to coincide with the point at which the State Pension age increases to 67. Thereafter it will be linked to the rate of State Pension Age increases.
With effect from 20 March 2014 HM Revenue & Customs is to get new powers to help prevent pension liberation schemes being registered, and make it easier for HMRC to de-register such schemes. From 1 September 2014 these changes include a provision that HMRC may refuse to register a scheme, or de-register an existing scheme if, in HMRC’s opinion, the scheme administrator is not a fit and proper person.
Transfers from defined benefit pension schemes
The Government is mindful of the attractiveness of transferring from a defined benefit pension to a defined contribution as a consequence of the proposed changes to how pension benefits can be accessed. The government is concerned with the exposure to the Exchequer of an increase in pension transfers from public service defined benefit schemes. As a consequence it intends to introduce legislation to remove the option to transfer to a defined contribution scheme in all but very limited circumstances. The government is also concerned that a large-scale transfer of members from private sector defined benefit schemes to defined contribution schemes could occur, which would have a detrimental impact on the wider economy. The government is open to views on how best to address the issue of transfers from non-public sector defined benefit schemes.