Budget 2014: Never a quiet year for pensions
Having been expected to give pensions a wide berth, George Osborne’s fourth Budget as Chancellor (delivered on 19 March 2014) heralded some significant changes for DC schemes aimed at generating flexibility for members when they come to retire.
In this Alert:
- From April 2015, radical changes to the rules on the use of members’ DC pots at retirement are being proposed, with the twin aims of simplifying the pensions tax regime and giving individuals more choice and flexibility.
- The Government is also considering to what extent it should extend these proposals to DB members.
- With the aim of providing greater flexibility for DC members now, certain changes are being introduced with effect from 27 March 2014.
- HMRC is to be given greater powers to help prevent pension liberation schemes being registered.
- No additional changes to the AA or standard LTA have been announced, despite pressure from the Liberal Democrats for further reductions.
Retirement income: Increasing flexibility
Shake-up of retirement options
The most significant announcement for pensions in this year’s Budget relates to the use of DC members’ pots on retirement. Due to current restrictions, around three quarters of individuals retiring each year buy an annuity. The main aim of the new measures is to give individuals above age 55 more freedom and choice as to how they use their savings from registered pension schemes.
As part of this review, the current rules on normal minimum pension age (NMPA) will be simplified so that, subject to scheme rules, pension savings can be taken from age 55 across the board. This will include trivial commutation, the current minimum age for which is 60. However, under the proposals, NMPA is set to rise to age 57 from 2028 (to coincide with the increase in SPA to 67).
A general overhaul of the tax framework for pensions is in the pipeline from 2015. Under the new system, it is proposed that everyone will have the flexibility to take their DC benefits from age 55 “whenever and however they wish”, regardless of their total DC pension savings. This will mean that individuals can take their benefits as a lump sum, purchase an annuity or draw down their DC benefits as they see fit. Regardless of how benefits are taken, individuals will be taxed at their marginal rate.
To help people make a decision that best suits their needs, from April 2015 everyone with a DC pension will be offered free and impartial face to face guidance on the range of options available to them at retirement.
Measures coming into effect from 27 March 2014
In the meantime, a number of measures will come into effect from 27 March 2014. These include:
- increasing the amount which can be taken as a lump sum under the general rules on “trivial commutation”, from £18,000 to £30,000
- increasing the maximum amount that can be taken out each year from a capped drawdown arrangement from 120% to 150% of an equivalent annuity
- reducing the minimum guaranteed income threshold for access to flexible drawdown from £20,000 to £12,000
- a fivefold increase in the size of a single small pension pot that can be taken as a lump sum at age 60, from £2,000 to £10,000
- in addition, increasing the total number of personal pension pots that can be taken as lump sums from two to three.
Although the Government’s stated intention is for these measures to apply to “pension savers with [DC] pension wealth”, confusingly, the draft legislation appears to extend these provisions more widely.
Impact for DB schemes
Recognising that the new system for DC retirement pots will have implications for individuals with DB pension savings, the Government is to consult on possible changes to DB pension schemes, both in the private and public sectors.
In particular, it will look at the extent to which the new flexibility for DC schemes should be extended to DB arrangements. This includes considering whether individuals should be allowed to continue to transfer their benefits from DB to DC and, if so, whether any restrictions should apply (for example, requiring that any funds transferred are ring-fenced and subject to the existing tax framework for DC arrangements). Although, in principle, the Government is open to continuing the existing flexibility of allowing individuals to switch from DB to DC, it will only do so “if it is clear that this would not create significant risks for the UK economy”.
Legislation is to be introduced in the Finance Bill 2014 that will give HMRC new powers to help prevent pension liberation schemes being registered and to make it easier for HMRC to de-register schemes.
The new provisions will enable HMRC to refuse to register a new scheme where:
- the scheme administrator (generally in the case of an occupational trust-based scheme, this means the trustees) is not a “fit and proper person”; and
- the scheme has been established for purposes other than providing pension benefits.
HMRC is to get greater information powers in connection with new applications to register a pension scheme in relation to scheme administrators and third parties, and to make enquiries as to whether the scheme administrator is a fit and proper person. Similar powers will be introduced surrounding the circumstances in which HMRC can de-register a pension scheme.
The Finance Bill is also expected to introduce legislation to ensure that regulatory redress, for example, in the form of transfers of sums and assets to registered pension schemes under certain court orders are taxed and relieved appropriately. The Government also intends to introduce measures in the Bill to ensure that independent trustees appointed by TPR will no longer be liable for tax that arose before they were appointed to the scheme in question.
These changes are generally due to take effect from 20 March 2014, with the “fit and proper person” test and provisions relating to regulatory intervention due to come into effect from 1 September 2014.
New scheme for pensioners
In the Autumn Statement 2013, the Government announced a new scheme for current pensioners, and those who reach SPA before the introduction of the single tier state pension in 2016, to top up their Additional State Pension record through a new class of voluntary NICs.
Budget 2014 sets out some more details of this scheme, which will be open for 18 months from October 2015 and available to everyone reaching SPA before 6 April 2016.