Flexibility of access to pensions from age 55
From April 2015, pension Investors aged 55, (or 10 years below the State Pension Age (SPA) as the SPA increases), will have increased flexibility as to how they access their defined contribution pension benefits. The different options that will be available are outlined below:
- Buy an annuity, as they can do currently. In addition, for short-term annuities, it will be possible to specify income that decreases during the annuity period. There will also be changes to the treatment of death benefits set on a joint life or guaranteed term basis. (See the section on the treatment of pension benefits after death, below.)
- Go into income drawdown. From 6th April 2015, the Flexi-Access Drawdown (FAD) will become available. It will replace the capped and flexible income drawdown options for individuals setting up a new plan after that date, and also for those with existing flexible drawdown plans as at 6th April 2015. Those in capped drawdown as at 6th April 2015 will be able to remain within capped drawdowns, if income limits are adhered to, and retain their Annual Allowance of up to £40,000.
The FAD will allow Investors to crystallise their fund and take their Pension Commencement Lump sum (PCLS), and then drawdown the rest as and when they choose. There will no longer be a minimum income requirement. Individuals in Flexi-Access Drawdown may continue to make contributions. However, once the FAD is in drawdown, i.e. withdrawals are made in addition to the tax-free cash, the Investor’s eligibility for tax relief on pension contributions will reduce from the Annual Allowance (AA) of £40,000 currently, to the Money Purchase Annual Allowance (MPAA) of £10,000. Withdrawals above the PCLS will be subject to income tax at the individual’s marginal rate.
- Take the whole fund as cash in one go. Any withdrawals in excess of the tax-free amount will be taxed as income at the Client’s marginal rate. This could have the effect of pushing certain Clients into a higher income-tax bracket.
- Leave the fund uncrystallised, take smaller lump sums, as and when they like. This is known as Uncrystallised Funds Pension Lump Sum (UFPLS). 25% of each withdrawal will be tax free and the rest will be subject to income tax. The exception to this is where the savings derive from disqualifying pension credits; these will be taxable in full as a tax-free lump sum may already have been paid in connection with these funds, before the pension-sharing order. Whilst the fund remains invested and uncrystallised, if the fund performs well, the amount of tax-free cash taken over time could add up to more than 25% of the original value of the fund. UFPLS will be payable only if the individual has lifetime allowance available.
Statutory override In order to allow existing schemes to cater for these new changes, the Government has announced a “permissive statutory override”. The permissive override allows trustees of existing schemes to offer the new retirement options without changing their scheme rules, while not forcing them into making expensive changes to older schemes with inflexible systems. Relaxation of block transfer rules It is also now allowable to take the lump sum from one provider and invest the remaining balance with another, whilst also retaining any protected pension age or lump sum entitlement. This applies to those individuals who built up pension benefits prior to April 2006 (A-Day) and who may, for example, have an entitlement to an enhanced PCLS above 25%, which is usually lost on transfer to another arrangement. Changes to pension contributions post April 2015 Pension contributions currently (and still will after April 2015) qualify for tax relief, subject to a £40,000 Annual Allowance (AA). However, if after April 2015 the Investor makes withdrawals above the PCLS from an UFPLS, a flexi-access drawdown or a flexible annuity, their further contributions to a defined contribution scheme could be restricted to the MPPA of £10,000. Those already in flexible drawdown before 6th April 2015 will also become subject to the MPAA. The MPAA will also apply to scheme pensions set up on or after 6th April 2015, from a scheme with less than 12 pensioner members.
- The MPAA does not apply to any benefits being built up in a defined benefit scheme, where the AA of £40,000 will still apply.
- The MPAA will not apply to an individual by virtue of their receiving a small-pot lump sum, i.e. it will not be triggered by the trivial commutation and the ‘small-pot’ rules.
- There is no carry forward allowance with MPAA, so unused annual allowance brought forward from earlier tax years will not be available to increase the £10,000 annual allowance for money purchase pension savings.
- Those Investors who flexibly access benefits and therefore become subject to the MPAA must, within 91 days, inform any of their pension providers to which contributions are subsequently paid, or face a £300 fine.Both the AA and MPAA are based on contributions made in the relevant Pension Input Period (PIP). Where the MPAA is triggered part-way through a PIP, it will only apply to contributions made after the trigger. The careful timing of the first withdrawal can therefore be used to minimise the effect.
Treatment of pension benefits after death From April 2015, any individual can inherit unused drawdown funds or uncrystallised money purchase funds on the death of the member, where those funds are used to provide a drawdown pension or pay a lump-sum death benefit. For someone who is not a dependant, there will be a new nominee’s flexi-access drawdown fund. In addition, any beneficiary with unused drawdown funds on their death can pass those funds to a successor, to be designated to provide a drawdown pension for that individual (a successor’s flexi-access drawdown fund) or to be paid as a lump-sum death benefit. Beneficiaries of individuals who die under the age of 75 with remaining uncrystallised or drawdown defined contribution pension funds, where no payments have been made to the beneficiary before 6th April 2015, will be able to receive such policies tax free, providing the funds are designated within a two-year period. This will also apply to beneficiaries of a joint life or guaranteed term annuity, so that annuity payments can be made tax free, where the member died before age 75. Joint life annuities will also now be payable to any nominated beneficiary, not just the dependant. Where the individual was over the age of 75 at death, the beneficiary will pay the marginal rate of income tax, or 45% if the funds are taken as a lump sum. From April 2016, lump-sum payments will also be taxed at the recipient’s marginal rate. Defined benefits schemes The Government will continue to allow members of private sector schemes offering defined benefits – that is, benefits other than money purchase or cash balance benefits – the freedom to transfer to other types of schemes. However, in the vast majority of cases where a member has defined benefits, it will continue to be in the best interests of the individual to remain in their scheme. Therefore, two additional safeguards will be introduced to protect individuals and schemes. First, there will be a new requirement for individuals transferring defined benefits out of a scheme to take Advice from a Financial Adviser before a transfer can be accepted. Secondly, there will be new guidance for trustees of schemes on using their existing powers to delay transfer payments, and taking account of scheme funding levels when deciding transfer values. Transfers will not, other than in very limited circumstances, be allowed from unfunded public service defined benefit schemes into schemes from which flexible benefits can be obtained. Secondly, for funded public service schemes, Ministers will have a power to reduce cash equivalent transfer values in circumstances where there is a risk to the taxpayer. Glossary AA Annual Allowance FAD Flexi-Access Drawdow MPAA Money Purchase Annual allowance n PCLS Pension Commencement Lump Sum PIP Pension Input period UFPLS Uncrystallised Funds Pension Lump Sum – a way of phasing full withdrawal and an alternative to those who cannot access FAD.