The draft Taxation of Pensions Bill has been published which makes provision for amendment of pensions’ tax legislation to give individuals greater flexibility to access their pension savings.
On 6 August 2014, HMRC published the draft Taxation of Pensions Bill (the Bill), and was subject to consultation which closed on 3 September 2014.
The Bill makes provision for amendment of pensions’ tax legislation to give individuals greater flexibility to access their pension savings.
Interim measures came into force on 27 March 2014, pending the 2015 reforms. These measures relaxed the basis on which income drawdown currently operates and allows a greater number of small pensions to be commuted on grounds of triviality.
The main provisions in the Bill are intended to come into force on 6 April 2015 and include:
- Abolishing the minimum income requirement for flexible drawdown and the annual withdrawal limit under capped drawdown. The Bill includes provision for a distinction between drawdown pension funds created before 6 April 2015 (to which the current tax rules may continue to apply) and those created on or after that date, to be known as “flexi-access drawdown funds” (FADFs). Individuals will be able to make uncapped withdrawals from a FADF each year once they have reached normal minimum pension age (NMPA) (currently age 55), a member’s protected pension age or before that age if an individual meets the ill-health condition (specified in the Finance Act 2004). Anyone who is in a capped drawdown arrangement on 5 April 2015 will be able to either convert that arrangement into a FADF or they will be able to designate new funds to their capped arrangement.
- The concept of a dependants' FADF, which includes similar tax rules for dependant’s pensions as those for FADFs, except that payment from a dependant’s FADF will not on its own trigger the money purchase allowance rules.
- A new authorised lump sum payment, to be known as an uncrystallised funds pension lump sum (UFPLS). 25% of the amount paid under an UFPLS will be tax free, with the remaining 75% taxable as pension income at the individual’s marginal rate of tax. (A UFPLS may not be paid as a death benefit, it may only be paid to a member).
- A limited right for scheme trustees to override their scheme rules to pay flexible pensions from money purchase pension savings (Permissive Override) as many scheme rules will not permit payments to be made using the new flexible access provisions. Scheme trustees will be able to choose whether or not to make these payments.
- Removal of restrictions on lifetime annuity payments, including the removal of the requirement that a life time annuity cannot decrease year to year once in payment.
- A reduced annual allowance of £10,000 for money purchase savings where the individual has flexibly accessed their pension savings. This is to ensure that individuals do not exploit the new system to gain unintended tax advantages.
- Reduction to the age limit for taking trivial commutation and small pot lump sums from age 60 to an individual’s NMPA or protected pension age.
From 6 April 2015, it will no longer be possible to take a trivial commutation lump sum from a money purchase arrangement. Instead, it will be possible to withdraw all the funds from a money purchase arrangement as a UFPLS. It will still be possible to take a trivial commutation lump sum from a defined benefits arrangement, where the value of the individual's total benefits in registered schemes does not exceed £30,000
Since many of these new flexibilities are permissive (with the exception of the new money purchase annual allowance), schemes will need to consider whether to allow its members the increased flexibility to access their pension savings, either through scheme amendments or by use of the Permissive Override.