A guide to pension changes. From 6 April 2015

Transcription

1 A guide to pension changes From 6 April 2015

2 2 If any members intend to take benefits in the near future, or are already doing so, it is important that they understand the changes that the government is introducing with effect from 6 April 2015.

3 The information contained in this guide explains the main changes but this is not a definitive guide. Pension and tax rules are complicated, so this should not be seen as a replacement for advice from a regulated financial adviser. The members should also read the relevant product literature to ensure they are clear on all of the implications before making any decisions to take benefits from the SSAS. Should the members choose to take benefits through income drawdown or an uncrystallised funds pension lump sum (UFPLS), they will need to bear in mind the sustainability of the chosen benefit method. Changes in circumstances, taxation, the performance of the underlying investments and the length of time that they live in retirement will all have an effect on the benefits available from the pension. Some of the legislation covering the way death benefits are paid is yet to be clarified so the information is based on our current understanding of the new rules.

4 What is changing in April 2015? The main changes are: How benefits can be taken from money purchase pension plans including a SSAS. Once benefits are taken, the amount that can be contributed to money purchase pension plans before having to pay a tax charge. What happens to pension funds on death. The availability of a government backed, free retirement guidance service. 2

5 What are the changes to how benefits can be taken? From 6 April 2015, there will be changes in the way benefits can be taken from the SSAS, subject to the minimum pension age (normally 55). The changes, which will affect how members can take benefits, include the introduction of flexi-access drawdown, a new form of income drawdown, and a new lump sum payment called an uncrystallised funds pension lump sum. Members will continue to have the option to purchase a lifetime annuity from an annuity provider. What is flexi-access drawdown? The regulatory changes mean that the limits on how much can be taken out of a pension fund will be lifted with the introduction of flexi-access drawdown. James Hay Partnership will offer flexi-access drawdown. Members will normally be able to take 25% of their fund as a tax-free pension commencement lump sum. Members will be able to take as much as they want from their remaining fund as pension income, but will have to pay income tax at their marginal rate on these payments. This means, for example, that if the income takes members into 3

6 the higher rate tax bracket, they may pay basic rate tax on some of the income and higher tax on the balance. Contributions and transfers from other pensions may still be made into the SSAS once it is in flexi-access drawdown. Taking a pension income via flexi-access drawdown (whether from the SSAS or another money purchase pension plan) means that the member will be subject to new money purchase annual allowance rules which are described later in this document. What is UFPLS? Uncrystallised funds pension lump sum (or UFPLS for short), is a way of taking money from the pension fund which has not yet been crystallised (i.e. it is not yet in drawdown). James Hay Partnership will offer UFPLS. There are certain criteria each member must meet to be eligible to take a UFPLS payment: a member must have more lifetime allowance remaining than the amount of the lump sum if under age 75 when it is paid; if the member is 75 or over when the lump sum is paid, they must have at least some lifetime allowance remaining at that time; a member cannot have enhanced or primary protection with a protected lump sum or a lifetime allowance enhancement where the available proportion of the lump sum allowance is less than 25%, and a member must have reached normal minimum pension age (55) or alternatively meet the ill-health conditions. 4

7 In addition, UFPLS is subject to the following: 25% of each UFPLS payment will be free of tax (the tax free element) with the remaining 75% of the payment being subject to income tax at the member s marginal rate; UFPLS payments will be tested against the lifetime allowance, and taking a UFPLS payment (whether via the SSAS or another money purchase pension plan) means that the member will be subject to new money purchase annual allowance rules which are described later in this document. Contributions and transfers of other pensions can be made into the SSAS once a UFPLS payment has been taken. What options are available for members currently in capped drawdown? A member can retain their fund as a capped drawdown fund and continue to draw income up to the annual maximum amount (which will continue to be recalculated regularly). If a member has additional funds within the SSAS from which benefits have yet to be taken, it will be possible to take these funds into capped drawdown after 6 April within the same plan and remain in capped drawdown (this is called additional designation). Contributions and transfers from other pensions can be made into the SSAS. A member can convert their capped drawdown fund to a flexi-access drawdown fund, either by notifying all Trustees that they wish to do so, or by taking more than the annual maximum amount allowed under capped drawdown (please refer to the previous section on flexi-access drawdown for further details). Also, if a member transfers other pensions they have into the SSAS and the transfers are made up of a mixture of plans in capped drawdown and plans in flexi-access drawdown, we 5

8 will convert all to flexi-access drawdown upon receipt. Once the member converts to flexi-access drawdown they cannot revert back to capped drawdown. What options are available for members currently in flexible drawdown? If a member is in flexible drawdown prior to 6 April 2015, then the drawdown fund will automatically be converted by the Trustees to flexi-access drawdown on 6 April Members may be able to make further pension contributions of up to 10,000 per annum (the money purchase annual allowance) without incurring an annual allowance charge. Care is needed if the member has any form of protection from the Lifetime Allowance. If a member is planning to take pension benefits from the SSAS after 6 April 2015 what choices will they have? They can do this via flexi-access drawdown or UFPLS, as explained previously. They can also purchase an annuity - James Hay Partnership is not an annuity provider but a member can use their fund to purchase an annuity on the open market. 6

9 Money purchase annual allowance rules The annual allowance restricts the maximum amount of pension savings a member can make in a year that benefit from tax relief. The annual allowance for the 2015/16 tax year is 40,000. However, if the amount contributed is over the annual allowance limit then the excess could be subject to an annual allowance tax charge. On 6 April 2015, new rules regarding what can be contributed will be introduced called the money purchase annual allowance. The money purchase annual allowance for the 2015/16 tax year has been set at 10,000. However, if the amount contributed is over the money purchase annual allowance then the excess could be subject to an annual allowance tax charge. The money purchase annual allowance will be triggered on the occurrence of one of the events listed below: an income payment from any pension fund in flexi-access drawdown; payment of a UFPLS; payment of a stand-alone lump sum under a money purchase arrangement (this is where certain conditions have been met 7

10 and all of a member s uncrystallised rights in a scheme have been paid as a lump sum) where the individual does not have enhanced protection; payment under a flexible annuity contract (a flexible annuity contract is one set up after 5 April 2015 where the terms of the contract allow payments to decrease other than in prescribed circumstances set out in regulations), and payment under a scheme pension, paid directly from scheme funds set up after 5 April 2015, where there are less than eleven other scheme pensions (including dependant s scheme pensions) in force under the scheme. What if a member is in a defined benefit (final salary) scheme? If a member is an active member of a defined benefit scheme (also referred to as a final salary scheme) they will retain a higher annual allowance relating to that scheme. In such a scenario, the calculation to determine whether they have exceeded the annual allowance for the year becomes complicated very quickly and therefore we would recommend they seek the advice of a financial adviser should they fall into this category. Can a member keep the full annual allowance ( 40,000 in 2015/16 tax year) and take pension benefits? It will only be possible to keep the full annual allowance once a member is taking pension benefits in the following scenarios: The member is in capped drawdown prior to 6 April 2015 and does not exceed the annual maximum income amount. The member is in flexi-access drawdown but only takes the tax free pension commencement lump sum and no taxable income. 8

11 Death benefits from 6 April Some of the legislation on the way death benefits are paid is yet to be clarified so the following information is based on our current understanding of the new rules. From 6 April 2015, members will be able to pass their pension funds to any beneficiary(s) upon death. On the death(s) of the beneficiary(s), any residual pension can then be passed on to their beneficiary(s). The tax treatment of that residual fund is dependent on the age of the beneficiary at the time of their death, and not the age of the original member. In addition to the options below, it will still be possible to leave the pension fund to a charity free of tax, if there are no dependants. Death before age 75 A member can pass the fund to any beneficiary(s) free of tax, provided this is done within two years of the date of death. For any part of the pension which is not in payment this will be tested against the lifetime allowance and any amount in excess of the lifetime allowance will still be subject to the lifetime allowance charge. 9

12 Other than the lifetime allowance, there will be no difference in the tax treatment between funds in payment and those which are not; therefore if the beneficiary(s) elects to take a lump sum from the fund the lump sum will in future be paid free of any tax. If they so choose, the beneficiary(s) could opt to take an income instead from the fund. Any income they take will be free of income tax. Whether benefits have been taken or not, the beneficiary(s) must elect to take a lump sum within two years of death otherwise there will be a tax charge. If the beneficiary(s) elects to take an income, the two year rule will also apply where benefits have not been paid to the deceased member. However, if benefits had been paid to the deceased member and their fund had already been tested against the lifetime allowance, the two year rule does not apply. Death after age 75 If death occurs at 75 or after, the beneficiary(s) can opt for the lump sum, and a tax charge at 45% will be applied whether benefits had been paid from the pension or not (the government intends to amend this to the recipient s marginal rate of tax from the 2016/17 tax year). If the beneficiary(s) elects instead to take an income from the fund, they will pay income tax on the income payments at their marginal rate. What if death occurs before 6 April 2015? If death occurs before 6 April 2015, it is possible for the beneficiary(s) to request the Trustees not to pay any death benefits until after 5 April This would mean that the new rules as outlined in this section would be applicable. 10

13 The Guidance Guarantee The Guidance Guarantee is a government initiative which entitles everyone with a defined contribution pension fund (such as a SSAS) to access free (at the point of delivery), impartial guidance, including the option of a face-to-face conversation about their options when accessing their pension savings. It will not be mandatory for people to take this guidance to access their pension savings, but they will be signposted to the Guidance Service before they do. This new service is to be called Pension Wise. The guidance does not replace financial advice given by regulated advisers. The objective of the Guidance Guarantee is to empower consumers to make informed and confident decisions on how they use their pension savings in retirement. The guidance is not intended to stray into areas such as specific product or provider recommendations, which would be better handled by an authorised financial adviser. The government is currently working with The Pensions Advisory Service and the Citizens Advice Bureau to provide the Guidance Service. Further details about how to access it, including online and telephone contact details, will become available before April

14 Where can I get further information on the changes? From your Financial Adviser if you would like to speak to a Financial Adviser but do not have one, please visit From our website at

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16 James Hay Partnership is able to provide literature in alternative formats. The formats available are: Large Print (as recommended by RNIB), Braille, Audio Tape and PC Disk. If you would like to receive this document in an alternative format please contact us on For the hard of hearing and / or speech impaired, please use the Typetalk service via James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHP 0096A FEB15 GDF Dunn s House, St Paul s Road, Salisbury SP2 7BF