A new pension revolution was kicked off by George Osborne in his fifth Budget in March 2014. There are a number of new options and changes to existing rules.

Defined Benefit or Defined Contribution?

The new flexibility rules mainly apply to defined contribution plans, such as personal pensions, but individuals with benefits in private sector or funded public sector defined benefit schemes or final salary schemes, can access the new flexibility by transferring out to an appropriate plan. Members of unfunded public sector schemes will be unable to transfer their benefits.

Annual Allowance

The annual allowance is the amount that everyone can put into their pension and is currently £40,000. However, this may not be the case if someone accesses benefits from their plan. The ways that someone can access their plan is under the pre April 2015 rules, or Capped Drawdown, under Flexible Drawdown or Uncrystallised Funds Pension Lump Sum. If someone was in Flexible Drawdown before April 2015, then this automatically becomes Flexible Access Drawdown, under the new rules.

The existing annual allowance continues to apply to individuals who take their benefits via capped drawdown (and income is kept within GAD limits) or a lifetime annuity. However, those individuals who take income via Flexible Access Drawdown or take an Uncrystallised Funds Pension Lump Sum (UFPLS) will automatically be subject to the Money Purchase Annual Allowance of £10,000.

How does this interact if the individual has both defined benefit and defined contribution benefits? In this scenario both annual allowances apply. A total annual allowance remains at £40,000 but with a maximum of £10,000 for any money purchase contributions.

Annuities

After 6 April 2015 annuities will continue to be subject to the requirement to be paid at least annually and for the lifetime of the annuitant. What has changed is:

  • The annuity income can be varied, up and down if it is agreed when the annuity is bought.
  • There will no longer be a requirement that the individual must have been given the opportunity to select the insurance company, although schemes may still offer the individual this opportunity should they wish.
  • The 10 year cap on guaranteed periods has been removed. Annuity payments can be guaranteed for any period if this is agreed when the annuity is bought.

For short term annuities see below.

More information can be found on page 7 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill.

Drawdown

Capped Drawdown

From 6 April 2015 it won’t be possible to set up any new capped drawdown plans. Existing capped drawdown plans can continue as long as the income doesn’t exceed the applicable GAD limits. Additional fund designations to existing capped drawdown plans will still be possible and the annual allowance of £40,000 can be maintained provided the income doesn’t exceed the applicable GAD limits.

If the GAD limits are breached the plan will be converted to a flexi-access plan and the annual allowance reduces to the Money Purchase Annual Allowance of £10,000.

More details can be found on page 8 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill.

Short Term Annuities

Existing short term annuities can continue to operate under the capped drawdown regime if the benefits payable remain within the GAD limits. The £40,000 annual allowance will be retained. If after 6 April 2015 they pay more income than the GAD limits allow it will trigger the £10,000 Money Purchase Annual Allowance.

Any short term annuities paid from a flexi-access plan will automatically trigger the £10,000 Money Purchase Annual Allowance, as more than the pension commencement lump sum will be paid.

More details can be found on page 11 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill.

Flexi-Access Drawdown

All new drawdown plans set up after 6 April 2015 will be flexi-access drawdown plans.

A tax-free lump sum of up to 25% of the crystallised fund (tax-free cash) is payable (if required) each time crystallisation takes place. The remaining 75% will be designated to provide drawdown, which may be taken as a regular income, as a single lump sum or on an ad hoc basis as required. The amount that can be withdrawn is not subject to income limits; however any amounts withdrawn will be added to the individual’s taxable income in that year.

There is no minimum income requirement. Individuals in flexi-access drawdown may continue to make contributions; however, if they take any income they will be subject to the Money Purchase Annual Allowance of £10,000.

More details can be found on page 8 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill.

Flexible Drawdown

Flexible drawdown plans will automatically be converted to flexi-access drawdown on 6 April 2015.

More details can be found on page 9 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill.

Block Transfers

The rules regarding block transfers for protected tax-free cash and/or low retirement ages still apply. However, a temporary easement to current ‘block transfer’ rules have been made to allow individuals to access the new retirement options, subject to the following conditions:

  • the individual must transfer all their rights under the scheme in a single transaction prior to 6 April 2015,
  • the individual must take all of their benefits from the new arrangements prior to 6 October 2015.

If these conditions can be met the individual can block transfer benefits prior to 6 April 2015 without the need for a buddy and keep their protected tax-free cash and/or low retirement age.

Alternatively these individuals can take their protected tax-free cash from the existing arrangement and transfer the residual funds to another arrangement again subject to the conditions above.

More details can be found in sections 7 and 8 of Pension Flexibility: Transitional issues associated with the pension changes that came into force on 27 March 2014.

Lump Sums

Death Benefits

On 29 September 2014 George Osborne announced some details regarding the new tax treatment of death benefits from pension plans and then on 1 October HM Revenue and Customs published further details about the changes. The proposed new rules are as follows:

There are two significant changes:

  • Death benefits from crystallised benefits can now be paid to any beneficiary, and not just to a dependant.
  • It is the date that death benefits are paid not the date of death that determines the tax treatment of the benefits. This includes deaths that happened prior to the announcement.

The rule that tax-free lump sum payments (where the individual died under 75) must be made within two years of the scheme administrator being notified of the death of the individual remain. It’s also worth noting that for deaths over age 75, the 45% tax charge could be avoided by taking the fund in two or more instalments.

Uncrystallised Funds Pension Lump Sums (UFPLS)

This option, available from 6 April 2015, will effectively replace the current small lump sum and triviality options for defined contribution arrangements.

To use this option the individual must be over age 55, not have primary or enhanced protection with protected tax-free cash over 25% and have available Lifetime Allowance (LTA):

  • those under age 75 will need the whole of the UFPLS to be within their LTA,
  • those over age 75 only require part of the UFPLS to be within their remaining LTA, however any amount in excess of the LTA will be taxed at 55%.

It is only available from uncrystallised funds (i.e. not drawdown).

Taking this option will trigger the Money Purchase Annual Allowance of £10,000.

75% of the value of the UFPLS will be added to the individual’s taxable income in that year and be taxed at their marginal rate.

More details can be found on page 11 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill and in Fiona Tait’s article – UFPLS explained.

Small Lump Sums and Triviality

The rules regarding small lump sums and triviality will remain in place for defined benefits schemes from 6 April 2015.

For defined contribution schemes the triviality rules will no longer apply from 6 April 2015. The small pots rule will apply but benefits taken will not trigger the Money Purchase Annual Allowance.

The minimum age will reduce to 55 for both small lump sums and triviality. Benefits can be taken before age 55 if the ill-health provisions apply.

More details can be found on page 33 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill.

Statutory Overide

A ‘permissive’ statutory override will be introduced which allows trustees of pension plans to operate under the new rules without having to amend their existing scheme rules, however it does not oblige them to do so.

It seems likely that trustees of older arrangements which don’t currently offer flexible retirement will not want to create (and pay for) the necessary processes and systems to deliver the new options. These individuals would have to transfer to another arrangement to access them. More details can be found on page 14 of Pensions Flexibility: Draft guidance on clauses for the Taxation of Pensions Bill and in Fiona Tait’s article – An overview of the (Draft) Taxation of Pensions Bill.

If you want to discuss any of the above and how it relates to your and your circumstances, please get in touch. Alternatively, leave a comment using the “comments” tab below.