Focus 98 – A year of change, 2014 round up
Given the radical nature of the proposed changes in pension legislation proposed in 2014, we thought a round up would be helpful. March saw the 2014 Budget speech which took us all by surprise, along with the subsequent announcements in September and the Autumn Statement.
Retirement options for money purchase schemes
Money purchase pension schemes have historically crystallised to an annuity or a drawdown product but unless they were able to secure enough pension income to access flexible drawdown, there were limits on the levels of withdrawal available. This all started to change in the Budget statement of 2014 with the introduction of new options:
- Uncrystallised funds pension lump sums (UFPLS) – these are single payments made up of 25% tax free cash and 75% taxed income. They are restricted to those with a standard entitlement to 25% pension commencement lump sums, with remaining lifetime allowance.
- Flexi-access drawdown (FAD) – this is akin to flexible drawdown without the entry requirements. Clients will be able to take any level of income without reference to maximum or GAD calculations. It is also possible to buy short term annuities under FAD.
- Flexible lifetime annuities – these are still lifetime annuities but they will be able to go down as well as up and the 10 year restriction on guarantee periods will be lifted.
Scheme pensions will also still be available, those already in capped drawdown will be able to continue within the limits and those in flexible drawdown will automatically convert to FAD on 6th April 2015.
Money purchase annual allowance rules (MPAA)
There was concern regarding potential abuse of the new income flexibilities, which could mean clients take money out and put it back in to gain additional tax relief. This has been pre-empted with the MPAA rules, which reduce a client’s annual allowance for money purchase contributions to £10,000 per annum (from £40,000 p.a.) at certain trigger points which are:
- 6th April 2015 for those already in flexible drawdown;
- Conversion from capped drawdown to FAD, either by request or when income limits are exceeded;
- Taking a UFPLS;
- Entering FAD and taking an income, just taking PCLS does not trigger MPAA rules;
- Starting a scheme pension where there are less than 12 members after 5th April 2015; and
- Purchasing a flexible annuity.
For those who trigger the MPAA rules and are still an active member of a final salary scheme, they are still entitled to the full annual allowance, but only £10,000 per annum can be used against money purchase contributions and anything over that £10,000 will trigger an annual allowance charge.
Lump sum death benefits
Lump sum death benefits had previously been taxed dependent on whether they were paid from crystallised or uncrystallised funds. That has now been removed and the only distinction is if the member dies before or after age 75. For all lump sum death benefits paid from a pre 75 fund there will be no tax, irrespective of whether the funds were previously crystallised or not. Those lump sums paid from a post 75 fund will be taxed at 45% for the tax year 2015/16 and the marginal rate of the recipient from the tax year 2016/17 onwards. The lump sums covered by these charges are:
- A pension protection lump sum death benefit
- An annuity protection lump sum death benefit
- A drawdown pension fund lump sum death benefit
- A flexi-drawdown fund lump sum death benefit
- A defined benefit lump sum death benefit
- An uncrystallised fund lump sum death benefit
In addition the 2 year rule to pay out benefits without incurring an unauthorised payment charge will be removed, but if benefits are paid out after 2 years they will incur the post 75 income tax charges.
Beneficiaries flexi access drawdown
Death benefit changes extend to dependants drawdown, which now includes options for any beneficiary, whether dependent or not. This legislation has introduced the ‘nominee’, which is a non dependent beneficiary nominated by a member or scheme administrator and the ‘successor’ who can receive benefits from a nominee, dependant or previous successor. There is no limit on the number of times a benefit can be passed down to a new successor.
The taxation of the fund remains the same as a normal pension fund, with no CGT or tax on investments. Income taken out of the fund is only taxed if the member, dependant, nominee or successor was over 75 at death or if the funds were not designated into beneficiaries flexi access drawdown within two years. This means that the tax status of income payments is determined by the age of the last person holding the fund at their death, which in turn means it could switch between being taxable income and tax free income.
All of these options are available to anyone who has a dependant’s drawdown fund, however, payments will only be tax free should they start after 5th April 2015 and not before.
Joint life annuities
In the autumn statement additional focus was given to annuity death payments, be these joint life payments or guarantee period payments. Again, they are only going to be taxable if the member dies over age 75. The extension to pay any beneficiary is also included in the proposal which, will likely mean that annuity providers will need to consider how they price joint life annuities because they may be paying them for a lot longer should a young person be nominated as a beneficiary.