Read the latest Taylor Patterson company news, or news relating to bespoke pension arrangements .
Now we have had the Autumn Statement with reference to that great Preston institution “Wallace and Grommit” let us try and bring together all of the announcements on pensions we have received so far and look at the changing world ahead of us.
HOW WE DRAW BENEFITS POST APRIL 2015:
Whilst the principle remains the same that the annuity must provide an income at least annually until death, there have been some changes. The ten year restriction on guarantees is removed. The annuity can pay out for any period after the members death provided it is set out in the annuity contract. The annuity will also allow flexibility for income levels to change, down as well as up, for example, when the state pension became payable. Whilst all this sounds attractive this increased flexibility will obviously come at a price which in turn may result in a lower income.
Drawdown Pensions/Capped Drawdown
Withdrawals will continue to be taken at up to 150% of GAD with triennial reviews and the need to get assets revalued on this date. It is possible to designate further funds to existing capped rules. These individuals will retain the full Annual Allowance. This is not available to those crystallising for the first time post April 2015.
Small Pots Lump Sum
You will be able to take up to 3 pension arrangements of less than £10,000, 25% of which will be tax free. This will help where providers do not offer flexi access. It should also be noted that these will not be counted towards an individual’s lifetime allowance.
These will continue with the same flexibility being offered to flexi access pension. There is no need to retain the capped drawdown for contribution purposes since a dependants pension does not affect an individuals annual allowance or lifetime allowance.
Will largely remain unchanged.
Flexi Access Pensions
This will be the new method of drawdown post April 2015 applying to all members taking benefits which lead to income for the first time. Those in capped drawdown can elect for this which will allow them to draw greater that the 150% ceiling and dispense with the need to do triennial reviews. An individual is able to take 25% of their fund tax free the rest they can take as they please at any point subject to their highest marginal rate of tax. Flexi Access will trigger the new lower contribution levels under “Money Purchase Annual Allowance”
Uncrystallised funds pension lump sum
This allows immediate access to tranches or an individual’s entire pension. It is subject to the same rules as flexi access where 25% will be tax free the rest is not designated for withdrawal but is actually drawn subject to tax at an individual’s marginal rate. It will not preserve any enhanced tax free cash and will trigger the new lower contribution levels. This arrangement may help where a provider is reluctant to provide full flexi access and a large proportion of benefits are required immediately.
It should be noted that funds are still generally tested against the lifetime allowance of currently £1.25 million.
The annual allowance remains at £40,000. Those currently in capped drawdown who would have a £40,000 allowance will be grandfathered over to allow this to continue post April 2015. This is unless they draw more than their cap, take new benefits which force them into flexi access or elect for flexi access.
Money Purchase Annual Allowance
In order to combat the potential for recycling money that is drawn from pension schemes by way of a tax relieved contribution back into schemes with an immediate withdrawal of 25% tax free cash, the government have introduced a new annual allowance of £10,000. This will apply from April 2015 to those who are already in flexible drawdown. This will be the new annual allowance for all who take benefits post April 2015 that draw above their tax free cash limits.
Removal of Age 75 Restriction
The treasury have decided not to change the age limit at which tax relief can be claimed on personal pension contributions. Such relief will continue to cease at age 75.
IN SUMMARY : CAPPED DRAWDOWN VS FLEXI ACCESS.
• Continue to restrict withdrawals to 150% of GAD
• Require triennial reviews which if property is an asset of the pension can be costly
• Will retain the greater contribution levels offered by the annual allowance.
• Not available post April 2015 for individuals taking benefits for the first time
Flexi Access Drawdown
• Will allow freedom to withdraw whatever income is required from the fund
• Generally doesn’t require any reviews
• Contributions restricted to the lower money purchase annual allowance.
• The only choice for those taking benefits for the first time post April 2015.
This is one of the areas that we have seen regular improvements since pension simplification:
It should be noted that there is now no difference if benefits have been drawn or not, it is simply the age of the deceased that stipulates the rules.
|Pre 75||Post 75|
|Lump sum tax free||Lump sum taxed at 45% *|
|Flexible access to funds, tax free||Flexible access to funds subject to marginal rate|
|Annuity tax free||Annuity taxed at marginal rate|
* It is proposed that in 2015/16 this will revert to an individuals highest marginal rate of tax
Generally there is a move away from financial dependants to beneficiaries which means funds may now be passed tax efficiently to adult family members. Expression of Wish documents will become critical with the complex way in which benefits can be paid.
It will be dependent on the provider as to whether they are able to offer “beneficiary drawdown accounts”. If this is offered and funds are retained in these accounts they will continue to grow tax free and be outside the estate for inheritance tax purposes. Furthermore it allows the recipient to nominate their own beneficiary to receive the funds on their death. The tax rate paid is determined by the age of the death of the previous drawdown account holder.
Guidance versus advice
It would appear that the guidance service that will be offered from April 2015 will be delivered by a number of partners including The Pension’s Advisory Service (TPAS) and the Money Advisory Service (MAS). The cost of this service this will be borne by financial services firms by way of a levy.
Minimum Pension Age
The Government has confirmed that they will increase the minimum age at which people can access their pensions under the new tax laws from 55 to 57 in 2028, this is in line with the increase in the state pension age. The minimum age will then follow the increasing state pension age, but will remain at 10 years below state pension age. The exceptions are public sector schemes that do not link their normal pension age to state pension age such as fire-fighters, police and armed forces.
Defined Benefit/Final Salary Transfers
There has already been much debate about the restrictions that were to apply to the transfer of defined benefit schemes. The Government has confirmed that they will allow transfers to the new flexible arrangements for funded defined benefit schemes.
They have introduced two new safeguards to protect against individuals who may be encouraged to leave those guarantees. The first is that an individual must take advice from a professional financial adviser who is independent from the defined benefit scheme and authorised by the Financial Conduct Authority (FCA) before a transfer can be accepted. There will also be new guidance to the trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
For certain individuals such as those to whom death benefits are very important defined benefit transfers could still be the correct answer, but receiving financial advice will be key to the decision.
We are still expecting to get further clarity as the proposals for the Finance Bill 2015 emerge.