Budget 2014 – HMRC issue further guidance
On 9th April, HMRC issued some guidance on the changes that are to be made to the Finance Bill in order to avoid penalising those who had made retirement decisions just prior to the budget. We are still waiting to see the actual draft legislation, but the announcement from HMRC clears up a number of areas that were a concern.
There were numerous changes announced in the 2014 Budget around pensions. These fell into two areas: firstly, the immediate changes; and secondly, the proposals for 2015.
The immediate changes are an interim measure to ensure that those wanting to take their benefits now have immediate increased flexibility. These are made up of a number of parts, all of which Talbot and Muir are able to accommodate immediately:
- Flexible drawdown is being made available to an increased number of people by way of a reduction in the minimum income requirement. It has been reduced from £20,000 to £12,000. You can read about this in our previous newsletter.
- Maximum capped drawdown income increased from 120% to 150% of the maximum GAD rate. This increase is available to drawdown years starting on or after 27th March 2014. Unless a triennial review is already due, there is no need for a valuation and the increase will just be applied to the basis amount. Talbot and Muir is not automatically increasing the level of income actually paid; if your clients require additional income, you will need to request this from your usual administrator. This may not be the case for all providers, so you will need to check with each drawdown provider to avoid any additional income being paid that is not required.
- Trivial commutation increases from £18,000 to £30,000. This is available for those with total pension savings of up to £30,000, and allows the residual fund after the pension commencement lump sum (PCLS) to be taken as taxed income at the individual’s marginal rate.
- The size of small pension pots that can be taken as a lump sum is increasing to £10,000 from £2,000. Three pots of this size will be able to be taken by an individual, an increase from two pots. Again, only the PCLS of each will be tax free and the residual funds will be taxed at marginal rate.
The changes which are proposed and currently under consultation are designed to allow members of defined contribution schemes increased flexibility in retirement. It proposes that there will be no maximum income level from drawdown, allowing members to take as much or as little income as they wish from their schemes. The PCLS is going to remain; generally 25% of the fund and income taken will be taxed at the individual’s marginal rate. This means it would be possible to take the whole pension fund in one go.
The press releases since the 2014 Budget had made reference to a number of easements that would be included in the Finance Bill 2014, but with little or no detail. However, the details released on 9th April from HMRC gave details of further changes that will be included in the Finance Bill 2014 covering a number of areas, including clarification that there is no scope to allow those who are already in receipt of income from annuities the ability to unwind the contracts.
Pension schemes have the ability to unwind annuity purchases provided they are still within the cooling off period. The scheme can take back the PCLS and remove the benefit crystallisation events. This would mean that the funds can be treated as uncrystallised giving full access to the new proposals.
For those that have cooled off from an annuity purchase but do not wish to return their PCLS or where a member of a scheme that will not accept the PCLS back, there are to be additional options. Members will now have 18 months from the date they took their PCLS to decide what form their pension income will take. They have a number of options:
- The funds can be returned to the original scheme, where they can be held until instructions are given.
- The funds can be held by the annuity provider until new instructions are given.
- The funds can be transferred to a drawdown provider to provide income if required. Currently, this would result in an unauthorised payment and hence it is not possible until the changes become law. It is likely that one of the first two options will need to be used in the meantime.
If a PCLS is retained and the residual fund increases, no further PCLS will be available. In addition, if the residual fund decreases, it will not cause a tax charge. The calculation of the maximum PCLS will stand at the date it was taken.
Pension schemes are given the option to allow all or some of the above changes, but each schemes operates their own set of rules within the legislation. This means that some schemes will not be able to offer all the options without changing their scheme rules, which they may not wish to do.