In his Budget earlier this year, the Chancellor George Osborne announced sweeping changes that will remove the limits on the pension benefits that can be drawn from your pension scheme each year as well as reduce the taxation of benefits payable to your family in the event of your death. These new rules are set to come into force from 6th April 2015.
At DP Pensions Ltd, we have always sought to offer our clients the full range of options open to them and this development will be no different. We anticipate that we will be able to offer the new options to all our clients as soon as they become available on the 6th April.
About this document
This Bulletin is based on our understanding of the legislation and guidance recently published by HMRC with regards to pension flexibility for money purchase schemes from 6th April 2015.
Every care has been taken to ensure that it is correct. It is issued by DP Pensions Ltd for use by our SSAS and SIPP clients and their advisers.
Please note that DP Pensions Ltd and D A Phillips & Co Ltd are 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 this draft legislation may 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.
Summary of current rules
Under current rules, members can usually take their pension benefits from age 55. This age restriction is not changing and so the options outlined in this bulletin will only be available to members once they reach that age.
Members who have taken or “crystallised” their funds could be drawing a pension from their SSAS or SIPP under one of the current options:
Capped drawdown – allows you to draw an income limited to a maximum annual amount.
Flexible drawdown – allows you to draw any level of income without limits provided you meet certain requirements.
Scheme pension – allows you to draw a level of income which is set by the scheme actuary.
The new options will be available to clients who, on the 5th April 2014, are taking their pension under capped drawdown or flexible drawdown as well as to all clients who crystallise their benefits after the new rules come into effect. However, the new options will not be available to clients who are drawing their pension under Scheme Pension. Those clients will continue to draw the level of pension set by the scheme actuary. The new options are outlined in more detail below.
Flexi Access Drawdown
A new income drawdown option, Flexi Access Drawdown (FAD), will be introduced. The key features of this option are outlined below.
If you crystallise benefits after 6th April 2015
A pension commencement lump sum (PCLS) usually up to 25% of your fund will still be available as per the current rules.
There will be no annual restrictions on how much of the remainder of the fund that can be taken as taxable income – no maximum income limits will apply. There will also be no minimum income requirement.
As with all pension options, FAD is taxed as pension income at your marginal rate.
Taking an income under FAD will trigger the new money purchase annual allowance rules, which will restrict how much you can contribute to your pension schemes going forward – see later section for details of this.
All new drawdown pension funds created after 6th April 2015 will automatically become flexi access drawdown funds. Capped drawdown and flexible drawdown will cease to be an option for members taking benefits for the first time.
Payment from a dependant’s flexi access drawdown fund will not trigger the money purchase annual allowance rules.
If you are in capped drawdown at the 6th April 2014
If you have entered capped drawdown prior to 6th April 2015, then you can continue with this as long as you do not exceed your annual pension limit. New funds can be designated into an existing capped drawdown fund without triggering the money purchase annual allowance rules.
You can convert your capped drawdown fund into a FAD fund at any time after the 6th April 2015. At this point, you will no longer be subject to the annual limit on your pension and will be able to draw any amount of pension income, but you will be subject to the money purchase annual allowance rules.
If you are in flexible drawdown at the 6th April 2014
If you have a flexible drawdown fund then this will automatically be converted to a FAD fund on the 6th April 2015 and the money purchase annual allowance rules will come into effect.
Uncrystallised Funds Pension Lump Sum (UFPLS)
In addition to FAD, you will have access to a second new way to take your benefits from 6th April. It is not a drawdown product, because it is a one off payment rather than an ongoing regular one.
Uncrystallised funds pension lump sum (UFPLS) allows you to crystallise a fund and take all of it as a one off lump sum (subject to tax on part). Under these rules, 25% of the payment will be tax free and 75% of the payment will be taxed as pension income at your marginal rate of income tax.
The whole of the fund that you crystallise will be paid out leaving no drawdown fund remaining. However, it is still a benefit crystallisation and your fund will be tested against your lifetime allowance as with all crystallisations. The key features of this product are:
The option of a UFPLS will not be available to a member if they have rights to a disqualifying pension credit, primary protection, enhanced protection or a right to take a tax free lump sum of greater than £375,000 on 5th April 2006.
You can take a UFPLS from your whole fund or from just part of it. If you take a UFPLS from part of your fund then you can take subsequent UFPLS payments on an ad-hoc or regular basis.
Taking a UFPLS will trigger the money purchase annual allowance rules
For members under age 75 any UFPLS paid in excess of the member’s lifetime allowance will be taxed at 55% and the remainder paid as a lifetime allowance excess lump sum.
For members over 75 the tax free lump sum can not exceed an amount equal to 25% of the members remaining lifetime allowance. The rest of the lump sum is taxable as pension income
An uncrystallised funds pension lump sum can only be paid to the member so is not a death benefit option.
Money Purchase Annual Allowance rules (MPAA)
The Annual Allowance is the total amount that can be contributed to pension schemes for an individual each year that will qualify for tax relief. The standard Annual Allowance is currently £40,000.
However, if you take a UFPLS payment or enter FAD then this will trigger the money purchase annual allowance rules, which will reduce the Annual Allowance from £40,000 to £10,000 for money purchase savings.
The MPAA rules will be effective from the day after the trigger event occurred. The Key points of this are:
In addition to reducing the level of the annual allowance, carry forward will also cease to exist for these members
If a member takes a small pot lump sum their annual allowance is not reduced to £10,000
Special lump sum death benefits charge
The following applies to payments made after 6th April 2015.
The lump sum death benefit tax charge for members over 75 and the serious ill health lump sum charge will reduce from 55% to 45%.
Certain lump sum death benefits paid where the member at the time of their death was under age 75 will be tax free. This includes a drawdown pension fund, a flexi drawdown fund and an uncrystallised funds lump sum death benefit.
Trivial commutation and small pot lump sums payment minimum pension age reduced from 60 to 55, or earlier if ill health conditions are met.
Trivial commutation lump sums (£30,000) can only be paid from defined benefit arrangements.
For Pre A Day (ie before 6th April 2006) crystallisations there is a formula to apply when the first crystallisation post A Day occurs (25xGAD Max) this formula is being amended so that the GAD Max is reduced to 80% of the figure being tested so (25×80% of GAD Max).
Pension Commencement Lump Sum (PCLS) recycling – The amount has changed from 1% of the LTA to £7,500. If the payment is viewed as PCLS recycling an unauthorised payment charge will apply.
New reporting requirements for members and scheme administrators are being introduced. This includes the requirement for the member to inform all of their pension schemes that are receiving contributions when they trigger the money purchase annual allowance rules.
The draft legislation and guidance issued by HMRC did not extend to cover all the proposed changes to death benefits and further information is expected to follow regarding:
Death before age 75
The ability to make payments to any nominated beneficiary
Pension payments to nominated beneficiaries to become tax free (the person receiving the pension will pay no tax on the money received)
Benefits will need to be nominated within two years to be tax free
Death after the age of 75
The ability to make payments to any nominated beneficiary
Pension payments to nominated beneficiaries will be paid subject to the beneficiaries marginal rate of income tax
Proposal for the lump sum payment subject to 45% to be amended to marginal rate by 2016
If you have any queries regarding the information in this Bulletin and about how it affects your circumstances then please contact your financial adviser.
This bulletin was issued by DP Pensions Ltd. Our contact details are as follows:
DP Pensions Limited
Bridewell House, Bridewell Lane, Tenterden Kent, TN30 6FA
Tel: 01580 762 555 Fax: 01580 766 444
Authorised and regulated by the Financial Conduct Authority
Registered in England No 4622475 Registered Office as above