Draft Taxation of Pensions Bill
On 6 August 2014, HMRC published for consultation draft guidance and legislation which will implement the changes to the pension tax rules announced in the Budget 2014 (please see our Alert for details).
In this Alert:
- Key points
- Drawdown pensions
- Anti avoidance: money purchase annual allowance
- Uncrystallised funds pension lump sum
- Scheme rules override
- Other changes
- Next steps
- The Taxation of Pensions Bill (the “Bill”) will amend pensions tax legislation to give individuals greater flexibility to access their DC pension savings.
- Most of the changes are intended to come into force on and from 6 April 2015, and will have effect in respect of pensions to which individuals become entitled on or after that date.
There are currently two types of drawdown:
- “capped drawdown” which is available to anyone over the age of 55 but the maximum annual income that can be drawn is limited to 150% of an equivalent annuity
- “unlimited drawdown” which is open to individuals who satisfy a “Minimum Income Requirement”, currently £12,000 a year.
The Bill will introduce 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”). There will be no restrictions on the amount of withdrawals that can be made from FADFs.
All existing funds of those in unlimited drawdown before 6 April 2015 will automatically convert into FADFs. Anyone who is in capped drawdown on 5 April 2015 will be able to either:
- convert their funds into an FADF or
- designate new funds to their capped arrangement.
The AA limits the amount of tax relief available on pension savings paid by or in respect of an individual to a registered pension scheme in any given tax year. Where pension savings exceed the AA, an AA charge applies. For the tax year 2014/15, the AA is £40,000.
To ensure that individuals do not exploit the new system to gain unintended tax advantages, the Bill will introduce a reduced AA of £10,000 for DC savings. Broadly, the new “money purchase AA rules” will be triggered where an individual flexibly accesses their DC pension savings. “Flexibly accessing” includes drawdown of pension (other than capped drawdown under the old rules) and uncrystallised funds pension lump sums (see below).
Individuals who have already taken their DC pensions will not trigger the new money purchase AA rules, unless or until they take benefits flexibly under the new rules.
Under the new money purchase AA rules, if an individual has new DC savings in a year of more than £10,000 they will be subject to an AA charge on the excess. In addition, the AA for the remainder of their pension savings (for example from a DB arrangement) will be reduced from £40,000 to £30,000 (the “alternative AA”). The usual rules on carrying forward unused AA from the three previous tax years will apply to the alternative AA.
If an individual does not exceed the £10,000 money purchase AA their total AA (for DB and DC savings) will continue to be £40,000 (plus any unused AA from the three previous tax years).
It will not be possible to carry forward unused money purchase AA.
Despite the introduction of the new money purchase AA rules, the Bill does not propose any changes to scheme pays. This means that an individual will still only be able to require their scheme to pay an AA charge if their total pension savings in that scheme in any given tax year exceed £40,000, and the AA charge is greater than £2,000. However, schemes may allow scheme pays on a voluntary basis, in return for a reduction in the individual’s benefits.
Recycling of a pension commencement lump sum (PCLS) involves using that lump sum to significantly increase contributions to a registered pension scheme.
From 6 April 2015, the recycling rules will be amended to apply where the value of a PCLS, added to any other such lump sums taken in the previous 12 month period, exceeds £10,000 (rather than 1% of the LTA as at present).
The Bill will introduce a new authorised lump sum payment, to be known as an “uncrystallised funds pension lump sum” (“UFPLS”). Subject to certain conditions, this will enable people to access their DC savings flexibly, without first creating a FADF.
Normally, one quarter (25%) of the amount paid under a UFPLS will be tax free, with the remaining 75% taxable as pension income at the individual’s marginal rate of tax. It will not be possible to take a PCLS in connection with a UFPLS.
From 6 April 2015:
- there will no longer be a requirement that the member or dependant must have been given an opportunity to select the insurance company which will provide their annuity (commonly known as the “open market option”), although schemes may still offer this
- the maximum ten year guarantee period for a lifetime annuity will be removed. This will enable annuities to continue to be paid after the member’s death
- all annuities will be permitted to reduce as well as to increase in value.
As many pension scheme rules will not permit payments to be made using the new flexible access provisions, the Bill will introduce a permissive “scheme rules override”. The override is intended to allow the trustees or managers of registered pension schemes to make the following payments within the new rules, without having to amend the scheme:
- drawdown pensions
- purchase of a short-term annuity
- dependants’ drawdown pensions
- purchase of a dependant’s short-term annuity
However, the trustees or managers will be able to choose whether or not to make any of these payments.
The Bill will also introduce measures to:
- reduce the age limit for taking trivial commutation and small pot lump sums from age 60 to the normal minimum pension age (currently age 55 or or a member’s protected pension age)
- amend the definition of trivial commutation lump sum so that such lump sums will only be payable from DB arrangements
- extend the trivial commutation lump sum death benefit rules to allow the remainder of a guaranteed pension (up to a value of £30,000) to be taken as a lump sum on death rather than continuing to pay it as a pension, and increase the maximum trivial commutation lump sum death benefit to £30,000
- remove the facility to pay winding-up lump sum death benefits because all such lump sums may be paid as trivial commutation lump sum death benefits.
The four week technical consultation closes on 3 September 2014. The Bill will be introduced into Parliament in the autumn.