5 Sep 2014
On the 21st July 2014 George Osborne presented to Parliament the Treasury’s response to the “Freedom and Choice in pensions” consultation. This provides further information on the Government’s intentions to introduce new pensions flexibility from 6th April 2015.
The document provides further information on several key areas:
How the Guidance Guarantee is to be provided
It has been confirmed that the Guidance Guarantee is to be provided by independent bodies (and not providers or advisers). This could include the Pension Advisory Service (TPAS) and Money Advice Service (MAS), along with Age UK or the Citizens Advice Bureau. The Guidance Guarantee will provide independent factual generic guidance. The service will be paid for through a levy on providers and advisers.
The guidance can be provided via several means. It could be provided online, via telephone, face to face or through skype. There should be a hand off to full regulated advice, and it will be interesting to see at what point full advice is recommended.
Scope to access new flexibility
The intention seems to be that the new retirement flexibility should be available to members of defined contribution pension schemes. Schemes won’t have to offer full flexibility, although they can rely on a statutory override (which would allow tax rules to be applied rather than scheme rules.) if they do want to be flexible. Interestingly there is also to be a consultation on the potential to provide ad hoc withdrawals from defined benefit schemes. Scheme members will have the right to transfer between defined contribution schemes right up until retirement age, giving them the opportunity to move from a scheme that has chosen not to operate full flexibility to one that has.
Confirmation of how income payments will be taxed
It has been confirmed that benefits can be taken in the form of 25% tax-free cash with the remainder being subject to income tax at marginal rate.
Availability of transfers from defined benefit schemes
Transfers won’t be available where the ceding scheme is an unfunded public sector scheme. (These schemes don’t have large funds available to be paid as transfer values.) Transfers from other defined benefit schemes will be allowable, however (where the transfer value is above £30,000) full independent advice must have been given. The individual must pay for the advice (unless the employer has instigated the transfer, in which case the employer must pay for the advice).
New restrictions on the annual allowance
To restrict the scope for tax abuse, if a member has taken benefits under the new rules, their annual allowance will reduce from £40,000 to £10,000. This would apply to someone who has taken tax-free cash (if applicable) plus some flexible income, or who (having been in capped drawdown before 6th April 2015) takes drawdown income payments above the (GAD maximum level.) Interestingly, you can take benefits using the “small pot” rules (up to 3 x £10,000) without reducing your scope to use the full annual allowance.
New flexibility for lifetime annuities
There is to be new scope to innovate in the annuity market.
Planned reduction to the tax charge on lump sum death benefits
It has been confirmed that the current 55% tax charge on the settlement of lump sum death benefits from vested pension schemes is to be reduced, although we don’t yet know the new level. The tax charge applies to lump sums settled both pre and post age 75. The new rate will be announced in the Chancellor’s Autumn Statement. We assume the tax charge wont vary dependent on when a plan was taken out.
Increase to the minimum pension age
It has been confirmed that the minimum pension age is to increase from 55 to 57 from 2028. Thereafter it will follow the State Pension Age, being ten years below it. (Exception being that the increase won’t apply to certain public sector schemes (e.g. Armed Forces and Police.)
Application of the triviality rules to defined benefit schemes
It has been confirmed that defined benefit schemes will also continue to be able to operate the trivial commutation and small pots rules, and these will be available from age 55 (instead of the current age 60).
Changes to QROP rules
It has been confirmed that the current requirements for QROPs will be amended to ensure that they fit in with the new flexibility options. Further guidance will be issued in due course.Next stepsThe changes will require new legislation. Draft legislation in the form of a Pensions Tax bill is to be published in August 2014. By October 2014 we are promised further announcements on the impact of the changes on State pensions and means tested benefits.
New opportunities for advice
These announcements highlight some further opportunities for advice.
As expected, holistic financial planning will involve maximising tax relief through the accumulation phase, and minimising tax charges when benefits are taken. The new flexibility brings with it a much more positive aspirational message towards pension planning and this is most welcome.