Accessing DC savings: The new rules.

Transcription

1 Accessing DC savings: The new rules

2 2 2 DCHQ Freedom and choice series: briefing 2 In addition to existing options such as cashing out a small lump sum, buying an annuity or going into drawdown, two new options for accessing DC savings from April 2015 are to: withdraw funds as a cash lump sum; or withdraw funds gradually via a flexi-access drawdown fund. Members will need to understand the impact that either of these options could have for their ongoing pension contributions and liability to potential annual allowance tax charges; and members currently in drawdown need to understand how they are affected by the changes. Allen & Overy LLP

3 3 LUMP SUM WITHDRAWAL A member who has reached normal minimum pension age, or who satisfies specific ill-health criteria, can withdraw part or all of his savings from a DC arrangement, up to his available lifetime allowance, as a lump sum (this is called an uncrystallised funds pension lump sum). Normal minimum pension age is currently 55, but will rise to 57 in 2028; some individuals have a protected pension age which is lower than 55. Some individuals won t be able to access funds in this way for example, members with primary or enhanced protection who benefit from protected lump sum rights (where the individual had a right to a tax-free lump sum worth over GBP375,000 at A-Day in 2006). For most people, though, this is a way of withdrawing part or all of their savings from funds worth over GBP10,000. Below that level, the funds can be cashed out under the small lump sum rules. 25% of the amount taken is paid tax-free and the remainder is taxed at the individual s marginal rate. Payment of an uncrystallised funds pension lump sum will trigger different annual allowance treatment going forward. Our next briefing will go into how this works in more detail, but the key point is that after you take one of these lump sums, future tax-relieved DC contributions are limited to GBP10,000 per year. Points to note Members who are continuing to make DC contributions and who have multiple DC pots will need to plan carefully the order in which they access their pots, and the method by which they choose to do it. For instance, if you re still making contributions and have several small pots, it makes sense to cash those out before accessing funds from larger pots and triggering a restricted annual allowance for future contributions. For individuals who are active members of a DB scheme, exceeding the GBP10,000 cap on future DC contributions will also affect annual allowance calculations in relation to their DB accrual, and they need to consider this before accessing their AVCs or DC rights in another scheme. FLEXI-ACCESS DRAWDOWN Drawdown funds created on or after 6 April 2015 will be flexi-access drawdown funds. These carry no minimum income requirement and no restriction on the amount that can be withdrawn at any time. Again, this applies to individuals who have reached normal minimum pension age or who meet the ill-health criteria. Tax-free cash works as a separate pension commencement lump sum worth up to 25% of the total funds being accessed (subject to having available lifetime allowance). The individual can then make unrestricted withdrawals from the funds designated for drawdown and these will be taxed at their marginal rate. Payment out of a flexi-access drawdown fund also triggers different annual allowance treatment, with the same effects as for lump sum cash withdrawals. However, designation of the funds doesn t have that effect members can access tax-free cash as a pension commencement lump sum when designating funds for drawdown, but their future tax-relieved DC contributions will only be restricted once they have received a payment from their flexi-access drawdown fund. This will be relevant for members who still want to make significant DC contributions of over GBP10,000 in any year, or who want to make DC contributions using carried-forward unused annual allowance from previous years. It s also worth noting that there are anti-recycling rules to prevent individuals investing more than GBP10,000 of a pension commencement lump sum back into a DC fund in order to obtain additional tax relief. Allen & Overy LLP 2014

4 4 Existing drawdown arrangements All new drawdown arrangements established on or after 6 April 2015 will be flexi-access drawdown funds. What happens for members who are already in drawdown before 6 April 2015? That depends on what type of drawdown they are in. Capped drawdown Existing capped drawdown arrangements can continue on their current basis, but members have an option to convert to flexi-access and make unrestricted withdrawals. Capped drawdown funds will convert automatically to flexi-access if any payment from the capped drawdown fund exceeds the 150% cap; but if a member keeps within the current rules and takes no other action, their capped drawdown arrangement will continue as it currently stands. Members can also designate further funds for drawdown under the same arrangement even after 6 April 2015, but no new capped drawdown funds can be created after that date. There will be no impact on the member s annual allowance unless and until they have converted to flexi-access drawdown and taken a payment from the converted fund, or they take a payment which would breach the cap, causing the capped drawdown fund to convert automatically. Flexible drawdown For members who are currently in flexible drawdown, the fund will convert automatically on 6 April 2015 to a flexi-access drawdown fund. One significant difference here is that at the moment, individuals in flexible drawdown have a nil annual allowance, so they don t get tax relief on any further pension contributions. From 6 April 2015 that will change: the GBP10,000 annual allowance applies to all individuals with flexi-access drawdown funds, so it will become possible for these individuals to make tax-relieved contributions to a DC arrangement up to that level. SUMMARY To recap, there are two new ways for members to access part or all of their DC savings from normal minimum pension age, either as a straight cash lump sum or as a capital fund which remains invested while the member draws down on it in whatever way they wish. Both of these routes enable members to take up to 25% of the funds accessed as tax-free cash, with the remainder taxed at their marginal rate; but both of them have an impact on any additional pension saving the member is planning to do in the future, by applying different annual allowance rules. Our next briefing goes into those alternative annual allowance rules in more depth. You can also find out more by visiting our DC resource base, SEPTEMBER 2014 Allen & Overy LLP 2014

5 FOR MORE INFORMATION, PLEASE CONTACT: Maria Stimpson Tel Däna Burstow Tel Neil Bowden Tel Helen Powell Tel GLOBAL PRESENCE Allen & Overy is an international legal practice with approximately 5,000 people, including some 526 partners, working in 44 offices worldwide. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi Amsterdam Antwerp Budapest Casablanca Doha Jakarta (associated office) London Luxembourg Prague Riyadh (associated office) Rome Athens (representative office) Bangkok Dubai Düsseldorf Madrid Mannheim São Paulo Shanghai Barcelona Frankfurt Milan Singapore Beijing Hamburg Moscow Sydney Belfast Hanoi Munich Tokyo Bratislava Ho Chi Minh City New York Warsaw Brussels Hong Kong Paris Washington, D.C. Bucharest (associated office) Istanbul Perth Yangon Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. Allen & Overy LLP 2014 CS1409_CDD-40046_ADD-47092_Briefing2