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Pensions from April 2015 – A summary

As we know, the Government intends that from April next year, individuals from the age of 55 with a defined contribution pension will be able to access their entire pension flexibly if they wish. The following summarises the main changes.

Defined contribution

The Government confirmed that the term ‘defined contribution’ is taken to mean both money purchase and cash balance arrangements. Clients will also be able to access Additional Voluntary Contributions (AVCs) flexibly, subject to their pension scheme rules.

Drawdown

Capped

Capped drawdown arrangements will continue after April 2015, with the same rules that applied before April 2015. The maximum capped drawdown income is 150% of GAD. It is possible to designate new money into an existing capped drawdown arrangement after the 5 April 2015. This will necessitate a recalculation of the basis amount. Triennial mandatory income reviews remain. Transfers of capped drawdown arrangements can be made to new capped drawdown arrangements.

Subject to a pension scheme offering it a member can tell the scheme to convert their capped drawdown arrangement to a Flexi-access arrangement. Alternatively, capped drawdown funds will automatically convert to flexi-access if the member takes drawdown income of more than the capped drawdown limit.

Flexi-access

Funds newly designated to new drawdown contracts on or after the 6 April 2015 will be known as “flexi-access” drawdown funds. Flexi-access drawdown can provide pension income which is not subject to any maximum income level; the member can take as much of their drawdown fund as they wish. Withdrawals from flexi-access drawdown will be subject to income tax.

Individuals in Flexible drawdown before April 2015 will automatically be in flexi-access drawdown from 6 April 2015.

Uncrystallised funds lump sum

This is a new option for individuals who do not want to designate funds into drawdown. As the name suggests, it is a lump sum paid directly from uncrystallised pension savings of which 25% will be tax free and the remainder subject to tax at their marginal rate.

It can be paid at any time after age 55 (or earlier if in ill health), as long as you have sufficient available lifetime allowance.

However, individuals with enhanced or primary protection with tax free cash lump sum rights of more than 25%, or restrictions on tax free cash of less than 25% cannot take an uncrystallised funds pension lump sum.

Not all schemes will offer this option, especially if they offer flexi-access drawdown as to the outside world they will appear exactly the same.

Another change to the annual allowance rules

New rules will be brought in to prevent the exploitation of the new flexible pension rules so that, for example, an individual over the age of 55 cannot divert their salary each year into their pension, take it out immediately and receive 25% of it tax-free.

In general, if an individual takes income from their pension when in flexi-access, in addition to tax free cash, they will be subject to a money purchase annual allowance of £10,000. The Treasury estimate that an annual allowance of £10,000 will cover 98% of pension savers over the age of 55.

Death benefits

True intergenerational sharing of pension funds on death will be possible. Anyone will be able to inherit pension funds in their own flexi access drawdown fund.

Tax

Generally remaining funds from defined contribution schemes can be paid out tax free if the member died before age 75 and the payments are within the members available lifetime allowance. If the member died after age 75 they will be taxed at the beneficiaries marginal rate (45% for lump sums paid in 2016/17 and marginal rate after then).

Other changes

Annuities 

Annuity rules are changing. It will be possible for an annuity to decrease in payment.

The current 10 year limit on guaranteed periods will be removed, with any remaining payments of a guaranteed annuity permitted to be paid as a lump sum where they are under £30,000.

Triviality & Small Pots

Trivial lump sums where the members’ total pension savings are worth less than £30,000 will not be available from defined contribution schemes from April 2015, but will continue to be available for defined benefit schemes.

However, the small pot option of 3 x £10,000 small pot payments that can be taken from personal pensions, RAC’s, FSAVC’s or section 32 will be available from the age 55 from the 6 April 2015 (currently the member has to be age 60).

Transfers from defined benefit to defined contribution

Private sector and funded public sector defined benefit (DB) pension schemes will be able to continue to transfer to the defined contribution (DC) environment. However, to ensure that such transfers are only made in the best interests of the member, there will be a statutory requirement on the transferring scheme to check that a member has taken advice from a professional financial adviser who is FCA authorised before allowing a transfer out of the scheme. The requirement for professional advice would not apply where total benefits are under £30,000 as the trivial commutation rules would still apply.

Transfers from unfunded public service defined benefit schemes are to be banned to protect the Exchequer and taxpayers.

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