I have pleasure to enclose our summary of the changes (some only proposed at this stage) announced in the Chancellors recent Budget. Whilst there have been no changes to the Lifetime Allowance, Annual Allowance or contribution rates this year it has certainly been a significant year for pensions and caught the whole pensions industry by surprise!
The changes that we know have been introduced with effect from 27th March 2014 are follows.
Capped Pension Drawdown
The maximum income that could be drawn was 120% of the income available from the factors provided by the Government Actuaries Department (GAD) however this maximum has now increased to 150%.
Flexible Pension Drawdown
If an individual had a secure pension income from specified sources of £20,000 per annum then it was possible to take an unlimited income. It is now only necessary to have a secure pension income of £12,000 per annum to take advantage of an unlimited income – this is available until 2015 when the new unlimited income becomes available.
If the value of an individual’s pension provision is less than £30,000 then the full value can be commuted as a lump sum – 25% of which is tax free and the balance of 75% taxed at marginal rates of tax. This has been increased from £18,000. This is not available until after age 60,
Regardless of the value of an individual’s overall pension provision if the value of an individual arrangement is less than £10,000 (previously £2,000) then the fund can be commuted for a lump sum – 25% of which is tax free and the balance of 75% taxed at marginal rates of tax.. This can be applied up to 3 personal pension small pots whereas previously it was restricted to 2 personal pension small pots.
The following changes are proposed to be introduced – mainly from 2015 – however some of these changes are subject to a consultation document published by the Treasury, and all will have to be included with a Pensions Bill.
Unfettered access to pension funds
The Budget proposes radical change from April 2015 allowing individuals with defined contribution arrangements who are above the minimum pension age to take an unlimited amount of income from their pension funds, effectively allowing up to the whole fund being taken as a one off payment. 25% will be available tax free and the balance taxed at the individual’s marginal rate of income tax.
Individuals will still be able to secure an annuity or use pension drawdown if they wish.
This flexibility will allow individuals to use their pension funds to repay mortgages or other debts, or take a reduced income initially to be increased in later years to assist with care costs.
Minimum Pension Age
Currently individuals cannot commence taking pension before age 55, unless they have a ‘protected retirement age’.
With effect from 2018 the minimum pension age will increase to 57, and then from 2028 it is expected to be tied to 10 years before state pension age. However the Treasury consultation paper goes further by posing the question as to whether it should be tied to 5 years before state pension age i.e. age 62 / 63,
This could have issues where term maintenance agreements were written to age 55, with the expectation that pension income could commence from this age.
Transfers from Public Sector Pension Schemes
Individuals will not be able to transfer from public sector pension schemes to defined contribution arrangements to take advantage of this new flexibility.
Transfers from Private Sector Defined Benefit Pension Schemes
The consultation paper considers 4 options as to whether members of private sector defined benefit schemes should be able to transfer to defined contribution schemes in the future.
Tax on pension drawdown death benefit
At present if an individual dies with benefits in pension drawdown any remaining fund paid as a lump sum is taxed at 55%. The Government is to consult as to whether the level of tax should be reduced possibly to 40%.
At present it is not possible to contribute to a pension arrangement beyond age 75. The Government is to consult on whether this restriction should be removed.
Existing Annuity Arrangements
These changes will not affect existing annuity contracts.