In this issue... Income drawdown changes from 27 March 2014 Flexible drawdown changes Trivial commutation changes Small lump sums Pension changes coming into effect from 6 April 2015 The Budget may have simplified pensions but, as with all changes, the devil is in the detail. With this News & Views Special we aim to summarise the main questions that have been posed by advisers since Mr Osborne dropped his bombshell, while also attempting to explain some key financial planning points that may be of relevance to your clients. Income drawdown changes from 27 March 2014 From 27 March 2014, when a client goes into drawdown for the first time, or has one of their scheduled triennial or annual reviews, the calculation of their maximum drawdown income will be based on 150% rather than 120% of the Government Actuary s Department equivalent annuity. What about those clients already in income drawdown on the 120% limit and who aren t due for a scheduled review at the start of their next pension year? The maximum income of clients already in income drawdown will automatically increase from the 120% figure to the 150% figure at the start of their next pension year. Is there any way that I can bring the increase in the maximum forward so that my client can benefit from it immediately? No. The earliest that the income will increase from 120% to 150% is the start of the next pension year. If a client moves additional funds into drawdown this will force an immediate review but it will take place at 120%. If the client transfers to another SIPP provider this will not force an immediate review, the existing limits will just carry over to the new scheme and remain in place until the start of the next pension year. How long will the new 150% maximum limit apply? The Government has announced that it is planning to scrap the maximum income with effect from 6 April 2015. It is expected that, from that date, rather than from the start of the next pension year after that date, all income limits will be removed from clients who are in, or subsequently move into, drawdown.
My client has only recently moved into drawdown. Can anything at all be done to move from the 120% limit to the 150% limit? All clients going into income drawdown for the first time have the right to cancel this decision within 30 days of the day on which they receive our confirmation that their pension benefits have been set up. If your client is still in the cancellation period and they wish to cancel their application for benefits and re-submit it on or after 27 March 2014 this can be done. If the pension commencement lump sum has been paid, it must be returned to us. HMRC has confirmed to us that, if cancellation rights are exercised in accordance with FCA regulations and the lump sum is repaid, they would not regard a Benefit Crystallisation Event as having taken place and no test against the lifetime allowance will have taken place. We will not need a new benefit form to be submitted for the new crystallisation but will require a letter signed by the client asking us to rely on the original benefit form for the purposes of the new calculation. When the post 27 March 2014 calculation takes place, the amount of the pension commencement lump sum paid to the client will change if the value of the underlying assets has changed. If we have yet to process the benefit case and you would like us to delay this until 27 March 2014 simply contact us now to let us know. Are there any other important implications or tax planning considerations as a result of the increase of the maximum income drawdown limit? Any clients who only hold a combination of pre A-Day benefits and uncrystallised benefits may need to take urgent action. This is because, when the uncrystallised benefits are eventually crystallised, the pre A-Day benefits will reduce the client s available lifetime allowance by a factor based on the client s maximum drawdown pension at that date. As the maximum drawdown pension available from the client s pre A-Day benefits is likely to increase significantly between 27 March 2014 and 26 March 2015 then it may be worth crystallising a small amount of the uncrystallised benefits now to force the calculation of the reduction of the lifetime allowance. Looking at an example: Your client has pre A-Day drawdown benefits offering a maximum pension of 30,000 based on the current 120% limit. They also have uncrystallised benefits. If the client decided to take the uncrystallised benefits today, their pre A-Day benefits would reduce their available lifetime allowance by 50%. The calculation looks like this: 30,000 x 25 = 750,000 750,000 / 1,500,000 (current lifetime allowance) = 50% If the client delayed taking the uncrystallised benefits until their maximum pension was based on the 150% factor AND the lifetime allowance had reduced to 1,250,000 the calculation would look like this: 37,500 (their increased maximum pension) x 25 = 937,500 937,500 / 1,250,000 (lifetime allowance from 6 April 2014) = 75% If the client crystallises a small amount now to force the reduction in the lifetime allowance, the client will still have 50% of their lifetime allowance left. If they wait, they will only have 25% of their lifetime allowance left because of the increase in maximum pension and drop in lifetime allowance. Andy Bell s News & Views Special 2
Flexible drawdown changes Clients looking to enter flexible drawdown will no longer need a secure annual pension income of 20,000 to qualify. The Minimum Income Requirement will fall to 12,000 from 27 March 2014. What types of income qualify for the Minimum Income Requirement? Only income that the Government considers to be a secure pension qualifies. This includes: Social Security Pensions paid by the state. Lifetime annuities paid from registered pension schemes. Scheme pensions paid from certain registered pension schemes. Payments under the Financial Assistance Scheme that are payable until death. Payments from overseas pension schemes or social security pensions that are substantially similar in characteristics to any of the first three options above. Does my client s drawdown income count towards the Minimum Income Requirement? No. The Government doesn t view drawdown as being a secure pension income, so it doesn t qualify. Does my client s income from non-pension investments count towards the Minimum Income Requirement? No. Only secure pension income qualifies. Are there any other important requirements that apply? In order to apply for flexible drawdown your client is not allowed to have made any contributions to a pension, or accrued benefits in a final salary scheme, in the current tax year. If they have done this the flexible drawdown declaration will be invalid and your client will face tax charges if they receive income above the capped drawdown limits (until 6 April 2015 when the maximum income will be removed). It is also important to remember that the Minimum Income Requirement is tested against income due to be received in that tax year, not just the entitlement. So, if an annuity of 12,000 has been purchased during the current tax year, only the income actually paid in this tax year will qualify. Finally, anyone accessing flexible drawdown who subsequently makes a pension contribution, or accrues additional benefits in a final salary scheme, will be subject to an annual allowance charge on the value of the contribution or accrual. This may fall away when the new pension flexibility comes into force from 6 April 2015 but this has not been confirmed. My client qualifies for flexible drawdown. How do they apply? Your client simply needs to complete and submit our Flexible Drawdown Declaration. They will need to supply documentary evidence of the secure pension income they are receiving. Trivial commutation changes The trivial commutation option allows clients aged 60 or over to take all of the funds in their pensions if the combined value of all of their pensions is below a limit. This limit is increasing from 18,000 to 30,000 with effect from 27 March 2014. Is the trivial commutation lump sum paid to my client subject to tax? Yes. The tax position varies depending on whether the trivial commutation lump sum is paid from uncrystallised or crystallised funds. Andy Bell s News & Views Special 3
If the trivial commutation lump sum is paid from uncrystallised funds 25% can be paid tax-free with the balance being subject to Income Tax. If the trivial commutation lump sum is paid from crystallised funds the whole lump sum is subject to Income Tax. If we do not hold details of the client s tax code, as provided by HM Revenue & Customs, the taxable element of the trivial commutation lump sum will normally be taxed on a BR Month 1 basis. My client qualifies for a trivial commutation lump sum. How do they apply? They simply need to complete our trivial commutation member declaration and submit this to us. Will the increase to the trivial commutation limit apply to defined benefit schemes as well as defined contribution schemes? Yes. The change in the limit applies to all registered pension schemes. Small lump sums The small lump sum option allows clients aged 60 or over to take all of the funds in a specific pension arrangement if the value of that arrangement is less than 2,000. Under current rules only two small lump sums may be paid to any individual, regardless of how many individual pension arrangements they hold that qualify. From 27 March 2014 the 2,000 limit will increase to 10,000 and the maximum number of small pot lump sums that a client can receive will increase from two to three. Is the small lump sum paid to my client subject to tax? Yes. The tax position varies depending on whether the small lump sum is paid from uncrystallised or crystallised funds. If the small lump sum is paid from uncrystallised funds 25% can be paid tax-free with the balance being subject to Income Tax. If the small lump sum is paid from crystallised funds the whole lump sum is subject to Income Tax. If we do not hold details of the client s tax code, as provided by HM Revenue & Customs, the taxable element of the small lump sum will normally be taxed on a BR Month 1 basis. My client qualifies for the payment of one or more small lump sums? How do they apply? Simply tell us that they wish to receive a small lump sum and we will issue the relevant paperwork. Is it possible to use the small lump sum rule in conjunction with the trivial commutation lump sum rules to give my client access to up to 60,000? Yes. The trivial commutation lump sum rules look at the total value of all pension funds, but it is possible for someone to reduce this amount to less than the new 30,000 limit by taking small lump sums. So, if your client has three separate pension arrangements each worth less than 10,000 and their other pension benefits are worth less than 30,000 they will be able to take small lump sums from each of the three sub- 10,000 pensions and then apply for trivial commutation. Andy Bell s News & Views Special 4
Pension changes coming into effect from 6 April 2015 From age 55, your clients will be able to take the whole of their SIPP fund as a lump sum. This can be taken partly as a tax-free lump sum, typically 25%, with the remainder as a lump sum taxed at their marginal rate of Income Tax. They will be able to continue receiving a pension, as is currently available under income drawdown rules, but there will be no limit on how much they can take as a taxable pension. These new rules will apply, regardless of whether the SIPP is already in drawdown. Will any changes to the lifetime allowance be made when the limits on taking funds from pensions come into effect? There has been no indication that the lifetime allowance will be scrapped or that there will be any further changes to its level. The lifetime allowance will still drop from 1.5 million to 1.25 million on 6 April 2014. Benefit crystallisation events will still occur when clients take their pension commencement lump sum and put funds into income withdrawal. Breaches of the lifetime allowance will still attract tax charges of 55% (if the excess is taken as a lump sum) or 25% (if the excess is left in the pension to be taken as taxable income). My client is due for a review of their maximum capped drawdown before 6 April 2015. Bearing in mind the impending removal of all limits, does this still need to take place? Our current understanding is that it does. If no review is completed and a client takes any pension from their fund HMRC is likely to view this as an unauthorised payment. We have asked HMRC what the tax implications would be, if any, where a review is not carried out and a client does not receive any income before all limits are removed. Will Sippcentre be making any changes to its charges for SIPPs in drawdown when the new rules come into force? We anticipate that the new rules will mean that most providers will be able to simplify their charges for clients in drawdown. Once the precise detail of the new rules has been confirmed we will provide more information regarding any changes to Sippcentre s charges. All statements concerning the tax treatment of products and their benefits are based on our understanding of the current law and HM Revenue & Customs (HMRC) practice and are for general guidance only. Whilst every effort has been made to ensure accuracy, no liabilities can be accepted for any errors or omissions. Levels and bases of, and reliefs from, taxation are subject to change. This document must not be copied or reproduced, in part or whole, without permission. Whilst efforts have been made to ensure the accuracy, neither the author nor his employer accept any responsibility or liability whatsoever in relation to the contents of this document. AJ Bell includes AJ Bell Holdings Limited and its wholly owned subsidiaries. AJ Bell Management Limited and AJ Bell Securities Limited are authorised and regulated by the Financial Services Authority. All companies are registered in England and Wales at Trafford House, Chester Road, Manchester M32 0RS www.sippcentre.co.uk Follow Andy Bell Bell @Snooper66