April 2015: Forthcoming Pension Changes Significant changes to pension regulations are being introduced on the 6 th April 2015. The legislation will be covered in the Taxation of Pensions Bill 2014 and Pension Schemes Bill 2014-2015. These new measures are aimed at giving more choice and flexibility about how people access their money purchase pension savings including the payment of benefits on death. The legislation introduces a new set of concepts and jargon. There are still some areas which have not been clarified but we have outlined here our understanding of the forthcoming changes. As these are far reaching, it has not been possible to produce a tailored announcement for each person s different circumstances. Please therefore contact us if you would like to discuss your specific scenario. Retirement options for money purchase pension schemes (including SSAS). From the 6 th April 2015, anyone aged 55 or over, or qualifying for ill health early retirement and with available Lifetime Allowance ( 1.25m unless subject to one of the protection regimes) will have the following options: 1. Uncrystallised Funds Pension Lump Sum A member can choose to withdraw a lump sum from their accumulated pension fund. Of each lump sum paid, 25% is tax free and the remaining 75% will be taxable as pension income at the individual s marginal rate of income tax. The 25% tax free element is not available for payments from Pension Credits (in respect of divorce) as a tax-free lump sum may already have been paid in connection with these funds before the pension-sharing order was issued. A payment of an Uncrystallised Funds Pension Lump Sum will be a benefit crystallisation event assessed against the Lifetime Allowance. Can this work like the current Phased Retirement where you receive your tax free lump sum of 25% of the Uncrystallised Funds Pension Lump Sum but do not have to draw the taxable element immediately? Is a payment from Pension Credits all taxable even if the original pension share was from uncrystallised funds? How will PAYE operate for one-off payments (i.e. do these have to be paid through a PAYE system which could be complicated, or are payments made gross and income tax paid via selfassessment)? 2. Flexi-Access Drawdown A tax free lump sum of 25% of the member s accumulated fund can be paid. The balance of the fund becomes a Flexi-Access Drawdown Fund. There are no restrictions on the amount or frequency of withdrawals that can be made from the Flexi-Access Drawdown Fund. Income tax at the member s marginal rate is payable on Flexi-Access withdrawals.
Those receiving the current Capped Drawdown (see below) can convert to Flexi-Access Drawdown should they wish (for example, if they want to receive withdrawals in excess of their maximum Capped Drawdown). Those with Flexible Drawdown funds prior to April 2015 will automatically become Flexi-Access Drawdown Funds. This introduces some advantages regarding pension contributions (see below). Can Flexi-Access Drawdown be phased? For example, an individual converts half their fund, receiving a tax free lump sum of 25% of the crystallised fund and leaves the balance to draw at a later date. 3. Annuity Purchase Annuity purchase will continue to be an option for paying retirement benefits. The new legislation is introducing some added flexibility to annuities. Lifetime Annuities will be allowed to reduce as well as increase. These will be known as Flexible Annuities. The maximum guarantee period of 10 years is being removed so any length of guarantee period can be included in an annuity. Short term annuity options will still be available. 4. Small Pot Lump Sums A new concept of Small Pots is being introduced. This replaces what is currently called Trivial Commutation. This will be available from age 55 (reduced from age 60) or in ill-health circumstances. Up to three personal pensions or any number of occupational pensions where the value of each does not exceed 10,000 can be received as a lump sum. Alternatively if an individual has less than three pension arrangements and their total value does not exceed 30,000 the total can be paid as a lump sum. In either scenario, 25% of any uncrystallised amount is paid tax free and the balance is subject to the individual s marginal rate of income tax. The concept of trivial commutation will still apply to defined benefit (final salary) arrangements only (not SSASs). Small pot lump sums are identical in concept to Flexi-Access Drawdown but have different treatment for maximum ongoing pension contributions (see below). 5. Capped Drawdown (not available for new retirement from 6 th April 2015) Capped Drawdown is the current standard type of pension withdrawal which is subject to a maximum annual amount determined using Government Actuary rates and is reviewed every three years (every year for those over age 75). Those receiving Capped Drawdown prior to April 2015 can continue to receive this, which will allow higher ongoing pension contributions if desired (see below). Capped Drawdown will NOT be an available option for people drawing retirement benefits for the first time after April 2015. A Capped Drawdown Fund can be converted to a Flexi-Access Drawdown Fund in order to be able to make unrestricted pension withdrawals from the fund (subject to income tax). Anyone who has partially crystallised their funds before April 2015 (i.e. Phased Retirement) and is receiving Capped Drawdown from the crystallised portion of their fund can crystallise the balance of their fund to pay Capped Drawdown after April 2015 if they wish.
Alternatively, the uncrystallised fund can be used to pay one of the other options available but maximum ongoing pension contributions will be affected (see below). Pension Contributions and the Annual Allowance The retirement option chosen above will determine the maximum level of pension contributions that can be paid going forward. Where retirement benefits are paid as an Uncrystallised Fund Pension Lump Sum, Flexi-Access Drawdown or a Flexible Annuity, a reduced Annual Allowance for pension contributions of 10,000 called the Money Purchase Annual Allowance is being introduced. Carry-forward of unused Annual Allowance from previous tax years will NOT be permitted for these individuals. As those in receipt of Flexible Drawdown before the 6 th April 2015 will be automatically converted to Flexi-Access Drawdown, their Annual Allowance also becomes 10,000 p.a. from the 6 th April 2015. This introduces the ability for them to pay limited ongoing pension contributions where they currently cannot. Those receiving Capped Drawdown prior to 6 th April 2015 who continue with this and do not convert to one of the other options can maintain an Annual Allowance for pension contributions of 40,000 with carry-forward being available. The reduced Annual Allowance and ban on carry-forward will not apply to those receiving Small Pot lump sum payments only, giving an advantage to this retirement option over the other options. Those who are members of a Money Purchase pension scheme AND a Defined Benefit (final salary) scheme will retain an Annual Allowance of 40,000. For example, if they are receiving Flexi-Access Drawdown and pay a 10,000 money purchase contribution and are also a member of a defined benefit scheme they have a residual annual allowance of 30,000 for the defined benefit scheme. The Tax Free Lump Sum recycling limit is being reduced to 10,000. This means that if all the following apply: tax free lump sums received in the last twelve months exceed 10,000, pension contributions increase by at least 30% from their previous level and the amount of the increased contributions is at least 30% of the tax free lump sums received, then the tax free lump sums will be deemed as recycled and will be taxable at between 40% and 70% depending on their amount. We should mention that it is not our responsibility to police tax free lump sum recycling and this is carried out by HM Revenue & Customs. In the case of death benefits, a Beneficiary s Annual Allowance is only restricted to 10,000 if their own accumulated pension funds are being paid as Flexi-Access Drawdown, Uncrystallised Fund Lump Sum Benefits or a Flexible Annuity. The maximum age limit for tax relief on pension contributions will be retained at 75. These new rules introduce two important considerations for those who are planning retirement but who also wish to maximise pension contributions either now or in the future: either to maximise pension contributions including utilising carry-forward before commencing one of Uncrystallised Fund Pension Lump Sums, Flexi-Access Drawdown or a Flexible Annuity; or to commence Capped Drawdown BEFORE 5 th April 2015 (which can be by phased retirement, crystallising only a small amount of fund) to allow an ongoing Annual Allowance for pension contributions of 40,000 with carry-forward being available and crystallise the balance of the fund as Capped Drawdown at a later date.
Death Benefits The new regulations will allow pension scheme members to nominate Beneficiaries who can receive benefits from an individual s fund on their death. The Beneficiary no longer has to be a dependant and can be anyone nominated by the deceased member. The Beneficiaries nominated by the deceased member will inherit their remaining accumulated fund. Regardless of whether the deceased member had crystallised their pension fund or not, if they died before age 75, any payments made to the Beneficiaries are paid tax-free provided they are designated for payment within two years of the member s death. If the member died before April 2015 and was under age 75 at the time, tax-free benefits can be paid provided no death benefits were paid before April 2015. Any uncrystallised funds on death before age 75 will be tested against the Lifetime Allowance at that time. Where the member dies after age 75 all payments are subject to the Beneficiary s marginal rate of income tax. If the whole inherited fund is withdrawn in one lump sum, the tax payable will be 45% until the 2016/17 tax year. This means that it is likely to be preferable for pension scheme members to commence their retirement benefits by withdrawing their maximum tax free lump sum on reaching age 75 because the remaining fund on death will be taxable. Beneficiaries can choose to receive their withdrawals from the inherited fund in any of the following forms: Uncrystallised Funds Pension Lump Sum (if they inherit uncrystallised pension funds), Flexi-Access Drawdown or annuity purchase. If a Beneficiary dies with unused inherited funds, these can be passed to a nominated successor to pay a successor s Flexi-Access Drawdown Fund or Flexi-Access Drawdown Lump Sum Death Benefit. Similar changes are also being made in respect of annuities so that pension death benefits from money purchase arrangements in the form of an annuity can be paid to anyone, not just a dependant, and payments from the annuity can be made tax free where the member died before age 75. The serious ill-health lump sum tax charge for immediate payment of a member s total fund on early retirement on serious ill health grounds is being reduced from 55% to 45%. The option to nominate a charity to receive a tax-free Charity Lump Sum Death Benefit will still be available. The maximum Small Pot Lump Sum Death Benefit is being increased to 30,000. If a beneficiary inherits a fund paying Capped Drawdown must that fund automatically convert to one of the new options or can they maintain a Capped Drawdown fund? Can a Successor s Flexi-Access Drawdown Fund or Flexi-Access Drawdown Lump Sum Death Benefit be received tax free where the original member died before age 75 or is the tax treatment determined by the age of the beneficiary on death? Can a deceased member s fund be reallocated to another member of the same pension scheme within that as one method of administering benefits on death? Pension Transfers Transfers from public sector defined benefit (final salary) schemes will no longer be permitted. Transfers from private sector funded defined benefit schemes will continue to be allowed. Transfer advice from an FCA authorised financial adviser must be obtained before a transfer from a defined benefit scheme is made.
Administrative Requirements The Budget 2014 announced that free guidance on retirement options would be made available to anyone retiring from a Money Purchase pension scheme. This will be called the Pensions Guidance Service and will be provided by The Pensions Advisory Service for telephone guidance and the Citizens Advice Bureau for face-to-face guidance. There will be a requirement on us to signpost the availability of the service and point retiring members towards it. The new regulations are introducing a number of other new administrative requirements, deadlines, record keeping and reporting requirements. We will need to make some revisions to our fee structure to account for these changes and the work involved. Statutory Override for Pension Scheme Rules The new legislation contains a limited right for pension scheme trustees and managers to override their scheme s current rules to pay these new retirement and death benefit options even if they are not permitted by the current rules. This means we will not need to adopt new rules for pension schemes to pay these new options. For more information or if you would like to discuss this further please contact us: t: 0161 408 4569 e: enquiries@whitehallgroup.co.uk Whitehall is the trading name of: Whitehall Group (UK) Limited, a company registered in England and Wales (Registered number 07625300), Whitehall Trustees Limited, a company registered in England and Wales (Registered number 07625294) and Whitehall Corporate Limited, a company registered in England and Wales (Registered number 07759590). All three companies have their registered office at 41 Greek Street, Stockport, Cheshire, SK3 8AX.