Finance Act 2014 receives Royal Assent


The Finance Act 2014, which received Royal Assent on 17 July 2014, introduces measures to put in place certain changes announced in this year’s Budget.  The changes to DC decumulation which are due to come into force in April 2015 will be dealt with in the Pensions Tax Bill, which has not yet been published.

In this Alert:

Key points

  • The Finance Act 2014 brings certain measures, which came into effect from 27 March 2014 by House of Commons resolution, formally onto the statute books.  These include, interim changes to capped and flexible drawdown and increases to certain commutation and “small pot” limits.
  • The time limits for payment of a pension commencement lump sum (PCLS) will be removed for a limited period to allow individuals to take advantage of the Budget changes to commutation and small pot limits, as well as DC decumulation.
  • HMRC will be given new powers which aim to combat pension liberation schemes.
  • The Act also contains measures to introduce IP14.

Pension Commencement Lump Sums

Under current tax rules, a PCLS must be paid within an 18 month period, starting 6 months before and ending 12 months after the member becomes entitled to their pension under the scheme.  If this condition is not met, the payment is unauthorised and the lump sum is taxed at 55%.

After the Budget, the Government confirmed that it would take action to ensure that people with DC benefits would not lose their right to a tax-free lump sum if they wanted to delay drawing their pension in order to take advantage of either the 2014 (increases to commutation and small pot limits) or 2015 (full flexibility for DC decumulation) changes.

The Finance Act 2014 will therefore disapply the usual time restrictions on the payment of a PCLS if certain conditions are met.

In addition, in certain circumstances, it will be possible to:

  • repay a PCLS to the scheme that paid it
  • transfer pension rights to another registered pension scheme after a PCLS has been paid.

These changes will come into force retrospectively, with effect from 27 March 2014.


Drawdown allows members to take an income stream from their pension pot, without purchasing an annuity.  With retrospective effect from 27 March 2014, the rules on drawdown introduced in April 2011 will be significantly relaxed:

  • the capped drawdown limit will be increased from 120% of the value of an equivalent annuity to 150%
  • the Minimum Income Requirement for unlimited drawdown limit will be reduced from £20,000 to £12,000.

Trivial commutation

The amount which can be taken as a lump sum under the general rules on trivial commutation increased on 27 March 2014 from £18,000 to £30,000.  HMRC have confirmed that this new limit applies in both DC and DB schemes.

Where a member has already taken a PCLS but would have been able to trivially commute all their benefits under the new limits, schemes will be able to pay them an additional “transitional 2013/14 lump sum” in respect of their pension.

Small pots

In order for trivial commutation to be available, the value of all the member’s pension pots added together (not including state provision) must be £30,000 or less.  However, this means that if the member has an aggregated pension pot of more than £30,000, they may be left with small benefits across a number of schemes.  In 2009, a new rule was introduced so that people with small pots with a value of £2,000 or less could take them as a lump sum.

This limit for small pots (both DB and DC) was increased to £10,000 with effect from 27 March 2014, and the number of personal pension pots which can be treated in this way has increased from two to three.

Again, it will be possible for a member who has already taken a PCLS to take advantage of the new limits for small pots and commute the rest of their benefits.

The small print

The changes to the commutation limits and drawdown were introduced by aHouse of Commons’ resolution made under the Provisional Collection of Taxes Act 1968.  This allowed HMRC to collect (and trustees of registered pension schemes to account for) income tax on lump sums paid on or after 27 March 2014 based on the higher limits, pending the Finance Act 2014 coming into force.

It is worth bearing in mind that paying a trivial commutation or small pot lump sum is subject to a number of restrictions, including that the member must currently be aged 60 or over.  In addition, the increase in the trivial commutation limit does not extend to trivial commutation, either of a dependant’s pension or on the winding-up of a scheme.

Pension liberation

The Finance Act 2014 will give HMRC new powers to help prevent pension liberation schemes being registered and 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.  These changes generally take effect from 20 March 2014.

The Finance Act 2014 also introduces 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.  Measures in the Act will also 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 provisions will come into force on 1 September 2014.

Individual Protection 2014

The standard LTA reduced from £1.5 million to £1.25 million on 6 April 2014.  To assist individuals who have built up pension savings based on the previous LTA, protection from the LTA charge is available in the form of FP14 (please see ourAlert for details).

The Finance Act 2014 introduces a new form of protection against the LTA, IP14.  It will allow individuals to protect the value of their pension savings as at 5 April 2014, up to an overall maximum of £1.5 million.

Anyone wishing to apply for IP14 will need to have their pension savings accurately valued as at 5 April 2014.  Individuals will therefore have until 5 April 2017 to apply for IP14, using form APSS240.  Applications can be made on HMRC’s website from 18 August 2014.

For further details on IP14, please see our Alert.