April 2015 Pension Changes Briefing

Transcription

1 April 2015 Pension Changes Briefing In the March 2014 Budget, followed up with further announcements culminating with the Autumn Statement on the 3 rd December 2014, radical changes have been proposed to the drawing of pension benefits and the treatment of pension schemes in retirement for those with Money Purchase (Defined Contribution) plans. The aim of this briefing is to outline the major changes to Money Purchase Pension plans. The technical details are, in places, quite complex so the aim of this Briefing is to provide a brief synopsis of the main changes which we hope you find clear and helpful. 1. The ability to take the entire fund as cash It was already possible for small pension pots under 18,000 to be fully drawn once one reached age 60 and the Chancellor proposed, in March 2014, that this was increased to 30,000 with immediate effect and that individuals would be able to take unlimited amounts from their pensions up to their entire fund from April 2015 from age 55 onwards. Much was made of buying Lamborghinis and similar in the press. The proposal will allow everybody with Money Purchase pension plans to encash their entire fund should they choose to do so. 25% of the fund value will be tax free with the balance treated as income for tax purposes. It is important to note that this income will be taxable at an individual s marginal tax rate and will not be tax-free as some have understood. 2. Flexible access to pensions after age 55 The Chancellor is proposing that from April 2015 individuals will be able to take their whole lump sum in one go or alternatively to take smaller lump sums periodically as they require. They will also, as noted above, be able to take regular income from their pension fund with no income limits on the amount drawn down with the income taxed at marginal rates. Currently for most in Drawdown there is a limit on how much income can be drawn but from April it will be possible for these individuals to elect to be under the new regime with no limit to income levels. This will have an effect on the maximum amount of future contributions that can be made so advice on the implications will be important.

2 3. Changes to annuities The Chancellor is proposing that annuity providers will be able to offer much more flexible annuities in the future. One proposal is that annuities will be able to reduce in value, in the past they have not been allowed to fall except in the case of investment linked annuities. They are also proposing temporary annuities and annuities that cater for Long Term Care, and even contingent annuities (where the annuity start date is deferred e.g. 20 year deferral, if one survives that long!) as a hedge against longevity will be allowed. It will be interesting to see how the market develops in this area. 4. Removal of Pensions Death Tax The current rules allow those in drawdown to leave any residual funds on death to a spouse or other dependent as a pension fund without tax on the transfer but with tax payable on the income taken by the spouse/dependent at their marginal rate of tax. It is also currently possible to leave any residual funds on death to any nominated beneficiary (even if not financially dependent) as a lump sum although this will, currently, be subject to a tax rate of 55%. The Chancellor is proposing that these rules will fundamentally change from April Significantly it will be possible for a pension fund to be left to non dependents, for example adult children, and that they will be able to retain in-situ as a pension fund and draw an income rather than have to take it as a lump sum. The tax implications will vary depending on whether the pensioner dies before or after age 75. Death before age 75 If a pension holder dies in drawdown before age 75 any residual funds will be available tax-free to their nominated beneficiaries, who can either be a spouse/dependent and/or non-dependent children or other nominated individuals. They will receive the residual fund as a pension fund with no inheritance or other taxes upon transfer. The residual fund will retain the tax advantages of a pension fund (i.e. no Capital Gains Tax and only very limited other tax) and the facility to draw income and/or capital lump sums tax free for life. Any residual funds left on the death of the beneficiary will similarly be passed on tax free to their nominated beneficiaries. Death after age 75 Again it is proposed that individuals will be able to inherit residual pension funds free of inheritance or other taxes and to retain these as pension funds from which they can draw an income and/or lump sums until the fund has been fully utilised. However there will be income tax at the recipient s marginal rate of tax payable on income taken. On death any residual funds can be passed on as a pension fund to nominated beneficiaries. Page 2 of 5

3 It might be helpful to illustrate the payment of death benefits by the use of flow charts. The flow chart below illustrates the current rules and the flow chart on page 4 illustrates the proposed rules from the 6 th April Current rules Page 3 of 5

4 Proposed rules from 6 April Death after buying an annuity As noted, on page2, annuity providers will be able to offer more flexible annuities in the future. To bring annuities in line with pensions in drawdown, for annuities that commence payment after 5 th April 2015 the annuity payments to a survivor or for any remaining guaranteed periods will be paid free of tax where the annuitant dies before age 75. Page 4 of 5

5 Conclusion The changes to be enacted represent a major change and improvement to the flexibility and tax treatment of Money Purchase pension benefits for pensioners. The changes to the tax treatment of death benefits is a very major relaxation and makes pensions even more attractive in terms of inheritance tax planning and even in terms of providing for a spouse/dependent particularly where death occurs before age 75. In our view the relaxation of limits on income that can be drawn, whilst welcome, it will be of limited benefit to our clients due to the potential tax traps that taking a large lump sum can create. It is important to note that Final Salary (Defined Benefit)) schemes are not covered by the new relaxations. There is a good deal of complexity in the proposed changes and the potential for making sub optimal choices significant. One needs to navigate the nuances of the new legislation carefully and therefore ongoing expert advice is essential. Roland Jones 9 th January 2015 Important Information/Risk Factors: This Briefing is based the proposals set out in the March 2014 Budget and the Autumn Statement Please be aware that most reforms can take a long time to come into effect, as they are subject to legislation. There is always as risk that some reforms may not happen or that other legislation may postpone their development. This Briefing is not intended as individual advice. If you require advice or further information please contact us. Page 5 of 5