27 April 2015
In the 2014 Budget, the Government outlined its proposals to give consumers greater access to their pensions savings. Initial changes included in the Finance Act 2014 introduced transitional arrangements.
The following outlines the changes which have taken place.
In addition to continuing to have access to normally 25% of a pension fund as tax-free cash, new regulations allow added flexibility in how your members may draw their pension savings, although this is subject to the rules of your scheme. There will be four main options which may be used in combination:
- Take a single or series of cash lump sums from your pension savings – this is sometimes referred to as ‘Uncrystallised Funds Pensions Lump Sums’.
- Flexi-access drawdown – a new form of drawdown which will allow an unlimited amount of income and/or lump sums to be taken from a pension fund. This replaces flexible and capped drawdown, although existing capped drawdown plans will continue.
- A pension annuity - a product that pays a secure income for life regardless of how long this is.
- Pension directly from a pension scheme - occupational pensions schemes are not changing but may allow more flexibility.
It is important that your members contact us as they approach retirement and we will let them know which of these options we may be able to offer them. Any options we offer will be subject to the rules of your scheme.
The options in more focus
Uncrystallised Funds Pensions Lump Sums.
From age 55, it is possible to take all or part of a pension fund as a cash lump sum – up to 25% of each payment being tax-free with the remaining 75% being added to income for the year and taxed accordingly. This may affect the rate of tax paid when added to any other income for that tax year.
Prudential can facilitate a partial or full encashment depending upon the pension plan. Trustees will make their own decisions and this flexibility will be subject to scheme rules.
Pension drawdown is now referred to as flexi-access drawdown and the amount of income or lump sums is limited to the value of the fund. It is still possible to draw all or part of a pension fund as a lump sum - 25% will be paid as a tax-free lump sum with any additional amounts added to income for the year and taxed accordingly. This may affect the rate of tax paid when added to any other income for that tax year.
Your members will need to consider whether flexi-access drawdown is right for them, as this may not provide a secure income and there is a risk that a pension fund may be used up earlier than expected, especially following a period of poor investment performance.
Prudential will continue to offer pension drawdown which will come under flexi-access rules. This can only take place through a transfer to the Prudential Flexible Retirement Plan. These transfers can only take place after a member has had financial advice. It is also possible to transfer to another provider’s drawdown product.
It will still be possible to purchase a lifetime annuity with pension savings. This will provide a secure level of income for life regardless of how long this is.
Prudential will continue to offer pension annuities. Members will continue to benefit from an open market option and shop around for the best product they feel is best suited to their circumstances.
Pension directly from a pension scheme
Occupational pensions schemes are not changing. Individuals will still be able to draw a pension from any occupational pension scheme. Some occupational pensions may opt to choose to introduce new flexibility which the regulations now allow.
Please contact your Prudential Client Manager who will run through the options for your scheme. It is also important that your members contact us as they approach retirement, for us to explain all the options available to them.
Pension Annual Allowance
The Government limits the amount that can be paid each year to all pensions, to benefit from tax relief. This is called the Annual Allowance. If this is exceeded, there may be a tax charge and Her Majesty’s Revenue and Customs (HMRC) must be informed by those affected, by completing a self-assessment tax return. The Annual Allowances are outlined below:
2014/2015 - £40,000
2015/2016 - £40,000
It is possible to “carry forward” unused allowance from the last three years to increase the allowance for the current year. The Annual Allowance includes all personal contributions, from an employer, any third party and increases in the value of any salary related pension benefits held.
Important information about a members Annual Allowance and taking pension flexibly
Money Purchase Annual Allowance
In addition to the standard Annual Allowance, there is an additional form of this called the Money Purchase Annual Allowance (MPAA).
The MPAA will apply if pension benefits have been accessed flexibly on or after 6th April 2015. Pension scheme providers will advise if this is the case.
Examples of these include taking income from flexi-access drawdown or a cash lump sum (Uncrystallised Funds Pensions Lump Sum).
The MPAA is £10,000 and would apply from when benefits are accessed flexibly. If this is the case a tax charge will be applied on any contributions to a money purchase pension which exceed this level. Also, in a year the MPAA is exceeded the standard Annual Allowance for any defined benefit pensions, such as a final salary or career average pension scheme, will reduce to £30,000.
This is a complicated subject and your members may wish to speak to a financial adviser or obtain further information from HMRC if they believe this will affect them.
A small pot is an arrangement (a pot of money) valued at less than £10,000. It is possible to take a cash lump sum as a small pot. The first 25% is paid tax-free and the remaining 75% will be added to income for the year and taxed accordingly. This will apply to all payments made under these rules.
This is subject to the rules of the occupational pension scheme.
Cash lump sums taken under small pots rules will not affect a members Annual Allowance.
Changes to how pensions are subject to tax on death
Tax treatment of pension benefits from April 2015
Table below summarises the tax treatment for pension funds depending upon age and whether the fund has been use to create income.
|From April 2015||Where the pension fund has been used to provide an income or a lump sum.||Where the pension fund has not been used to provide a lump sum or an income.|
|Below Age 75||This can pass to beneficiaries completely tax free as a lump sum or as a flexi-access pension.*||Can pass to beneficiaries completely tax free as a lump sum*or income to any beneficiary (up to the lifetime allowance).|
|Above Age 75||Any beneficiary can receive benefits as pension draw down at their marginal rate of income tax (or 45% charge if paid as a cash lump sum). From April 2016 it is the intention this will be at their marginal rate of income tax.|
* provided this is paid within two years of notifying the scheme of the death.
Tax treatment of joint life annuities on death
Provided the first annuity payment is made after 6th April 2015 the following tax treatment will apply upon death. Outlined below is the new change:
If an annuitant for a joint life annuity is below age 75 at date of death, any beneficiary can receive the remaining income tax free. If not these will be taxed at the beneficiary’s marginal rate of income tax. These rules are subject to the beneficiaries taking income within 2 years from notifying the scheme of death or from when the scheme should have reasonably known that death has occurred.
Choosing how to draw pension savings is one of the most important decisions your members are likely to make, so we recommend that they obtain guidance or advice to help them with this decision. Pension Wise is a new service from the Government which offers free and impartial guidance. This service is available on the internet, over the telephone, or face to face.
You can find out how your members may access this service by visiting www.pensionwise.gov.uk.
To find out more about these important changes, please speak to your Prudential Client Manager.