About this document

This Bulletin is based on our understanding of current and proposed legislation and HMRC practice and every care has been taken to ensure it is correct. It is issued by DP Pensions Ltd for use by our SSAS and SIPP clients and their advisers. By its very nature it is a précis and can only be treated as a simplified indication of detailed legislation.
Please note that DP Pensions Ltd is not authorised to give financial advice. We do not know all of your circumstances or details of any other pension schemes of which you are a member. You should contact your financial adviser for help on how these new rules affect you personally.
No responsibility to any third party is accepted if this information is used for any other purpose. The legislation and HMRC practice may change in the future

The Changes

On the 19th March 2014, Chancellor George Osborne announced big changes to pensions in the Budget 2014. Some of the changes to registered pension schemes tax rules announced were foreseeable, but the headline change – the wiping away of all restrictions on drawdown of pension funds at retirement – came completely out of the blue. Some of the changes will be effective from the 27th March 2014, while some will come in next year (April 2015) following consultation.
The key announcements are outlined below.

Changes with effect from the 27th March 2014

Increase to Capped Drawdown

In 2011, the Government reduced the rate that we use to calculate the maximum pension that a member can draw from their pension each year under capped drawdown. We were required to use 100% of the Government Actuary Department (GAD) Rate, rather than the 120% that we could use previously. Then on 26th March 2013, the rate was increased back up to 120%.
The Government has now announced that the rate will be increased again to 150% of GAD. Legislation needed to affect this change is in the Finance Bill 2014 which should receive Royal Assent in the summer.
The change will take effect from the 27th March 2014. Members can take advantage of the new rate from the start of their next pension year following this date. A member’s pension year normally runs from the anniversary of the date that they initially took their benefits.
However, please note that since the primary legislation will not be enacted until the summer of 2014, we will require an indemnity from members wishing to take advantage of the new limits before the Finance Bill receives Royal Assent.

More flexible Flexible Drawdown

Flexible drawdown allows members to draw a pension without any limits provided they meet a Minimum Income Requirement (MIR). The MIR must be provided by a secure pension income made up of social security pensions, lifetime or dependents’ annuities or scheme pension provided by schemes with more than 20 members.
The Minimum Income Requirement was £20,000 pa, but the Government announced that it will reduce to £12,000 pa from the 27th March 2014.

Trivial Commutation

The Government also announced that from the 27th March 2014, they will increase to £30,000 the maximum total fund value to qualify for trivial commutation whereby pensions can be cashed-in.
They will remove revaluation factor for determining how much of the commutation limit is used up by previous crystallisations.
They will increase the “small pots” commutation limit to £10,000 per pot that can be cashed-in and increase the number of such small pots that can be commuted to three.

Changes that will come into effect later (subject to consultation)

In addition to the above changes, the Government also announced further measures that could remove all limits on the amount of pension that a member can draw from their pension fund. The following announcements are in their early stages of development and need to go through consultation before they are finalised. This means that they may change before they become law.

Flexible Drawdown for all

The Government announced that it plans to completely remove the restrictions on the rate at which crystallised funds may be drawn from a defined contribution (DC) scheme from April 2015. At the moment members are taxed at 55% if they draw a pension in excess of the capped drawdown limits above (unless they are on flexible drawdown).
Instead the Government proposes to tax all withdrawals (other than the pension commencement lump sum which is tax free) at the member’s marginal rate of income tax. This will essentially mean flexible drawdown will be extended to all members with no minimum income requirements or other criteria to be met. So members will be able to draw any level of pension they want.
The pension commencement lump sum (tax free cash) rules which allow a payment of usually 25% of the member’s fund to be paid when they take their benefits are unchanged. All remaining funds will simply be taxed at the member’s marginal rate as and when received.
The Government also announced a possible reduction of the current 55% tax charge on lump sums from crystallised funds on death.
There will likely be a ban on transfers from public sector defined benefit (DB) schemes – and possibly from all DB (otherwise known as final salary) schemes – to defined contribution (DC) schemes, or at least restrictions on the use of transferred funds, to prevent a sudden haemorrhaging of funds from people looking to take advantage of this new flexibility.
Finally, the Government announced it plans to increase the minimum pension access age from 55 to 57 from April 6th 2028 (the date on which state pension age becomes 67).
For more information please see https://www.gov.uk/government/consultations/freedom-and-choice-in-pensions
There are no (new) changes proposed to the maximum pension contribution (annual allowance) or to limits on maximum pension fund accumulated (lifetime allowance), or to the availability of higher and additional rate income tax relief on contributions.

“A guidance guarantee”

The Government announced that it intends to introduce a ‘guidance guarantee’ meaning all individuals with a defined contribution pension will be offered free guidance at the point of retirement from April 2015.
The government said the guidance must be “impartial and of consistently good quality”. It also must:

• cover the individual’s range of options to help them make sound decisions and equip them to take action, whether that is seeking further advice or purchasing a product;
• be free to the consumer; and
• be offered face to face.

The government has asked the Financial Conduct Authority to make sure this guidance meets “robust” standards, working closely with consumer groups.
The government will also make a £20m development fund available to get the initiative up and running over the next 2 years although product providers are estimating this will cost much more.

“Battle lines drawn on pension liberation fraud”

HM Revenue & Customs (HMRC) is set to receive new powers to help it fight the battle against pension liberation fraud. Pension liberation also known as ‘pension loans’ and ‘pension scams’, is a transfer of a scheme member’s pension savings to an arrangement that will allow them to access their funds before the age of 55.
In rare cases – such as terminal illness – it is possible to access funds before age 55 from a current pension scheme. For the majority, promises of early cash will be bogus and are likely to result in serious tax consequences.
HMRC was granted new powers to de-authorise schemes which it suspects are being used for pension liberation fraud and to block the registration of schemes which it deems unsuitable.
HMRC will have the power to require scheme administrators to pass a ‘fit and proper person’ test. The powers will allow HMRC to refuse to register a scheme, or de-register an existing scheme if, in HMRC’s opinion, the scheme administrator is not a fit and proper person.
The test will come into effect in September.
HMRC will have new powers to send information notices to the scheme administrator and other persons, in order to help it decide whether or not to register a pension scheme.
HMRC will also have new powers to enter business premises and to inspect documents.
HMRC’s guidance note is here: https://www.gov.uk/government/publications/pensions-liberation-guidance-note