Newsletter: Pension Changes 2014

Newsletter: Pension Changes 2014

                                    

The proposals announced in the Chancellor of the Exchequer’s Budget Statement and the HM Treasury Consultation Document issued in March 2014 were subject to a period of consultation which has now closed.

Background

The Budget proposed the following pension changes: 

       From 27 March 2014:

• The capped draw-down Government Actuary's Department (GAD) limit will be increased from 120% to 150%.
• The minimum income requirement for accessing flexible draw-down will be reduced from £20,000 to £12,000.
• The amount for small individual pension pots that can be taken as a lump sum (regardless of total pension wealth) will increase from £2,000 to £10,000 and individuals will be able to take 3 individual pension pots as lump sums (previously only 2 allowed).
• The total pension wealth that people can have before they are no longer entitled to receive lump sums under trivial commutation rules will increase from £18,000 to £30,000              From January 2015:
• National Savings & Investments will be offering a 1yr pensioner bond that is
  expected to pay 2.8% and a 3yr pensioner bond that will be paying 4%. Maximum investment £10,000.
  From 6 April 2015:
• Unlimited access to pension funds from age 55 with 25% tax free and the remainder at marginal rates of income tax.
• Proposal to link the minimum pension age 55 to State Pension Age (SPA) by introducing the minimum age to SPA minus 10 years.
• All individuals with defined contribution pension pots are offered free and impartial face-to-face guidance at the point of retirement and up to £20 million will be made available in the next 2 years to develop this initiative

Current position

Following the consultation period, the proposals appear to have been left more or less unaltered, but some additional amendments have been included in the full government response published on the 21^st July 2014.

The main areas of the consultation, which is now expected to become law from April 2015, are as follows: 

From age 55 (increasing to age 57 in line with State Pension Age by 2028) all individuals with defined contribution pension benefits will be able to access all of their fund, subject to only their highest marginal rate of taxation

• The 25% tax free cash entitlement will remain. The remainder of a money purchase pension scheme “pot” may be accessed, without penalty, at any age over 55. Any income (in excess of the 25% tax-free cash entitlement) taken from the pot will be subject to income tax, as appropriate.

• Transfers out of private sector defined benefit schemes and funded public sector schemes will continue to be permitted.
• ‘Free and impartial guidance’ will be available to anyone wishing to vest their pension benefits, although it is unlikely this will be provided via the IFA community or through product providers.
• Access to the above guidance must be arranged by the pension provider who will also have a duty to make individuals aware of this entitlement.

• Pension changes brought in immediately after the March budget will remain in place (eg. up to £30,000 lump sum ‘triviality’ option, 3 x £10k ‘small pot’ vesting and 150% GAD limit on existing capped draw-down plans).

In addition to the above updates, the government’s response to the consultation document also includes some additional proposals. Significant among these are the following: 

• A proposal to limit new pension contributions for anyone using pension flexible access to a maximum of £10,000 gross per annum (this proposal is designed to limit the ‘recycling’ of tax free cash and pension income to obtain additional tax relief, or to use ‘salary sacrifice’ to avoid National Insurance charges on income after age 55)
• A proposal to introduce a new (as yet unspecified) level of tax on the payment of death benefits from defined contribution pension schemes in draw-down, in line with the reduced level of taxation on vesting
• A ‘permissive statutory override’ for pension schemes, which will permit them to pay out pension benefits flexibly, in line with (new) tax rules, rather than in line with existing scheme pension rules
• Statutory provision to allow transfers between defined contribution schemes at any point up to the scheme’s Normal Retirement Date (some occupational schemes do not currently allow transfers out within twelve months of the scheme NRD)
• Amend lifetime annuity legislation to allow additional options such as decreasing annuities, lump sum withdrawals and guarantees in excess of ten years.

In2Matrix (UK) Limited is an appointed representative of In2Consulting Limited, 

which is authorised and regulated by the Financial Conduct Authority.