April 2015 Pension Changes Briefing
In the March 2014 Budget, followed up with further announcements culminating with the Autumn Statement on the 3rd 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.
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 2015.
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.
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April 2015 Pension Changes Briefing - 9 January 2015
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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 6th April 2015.
Current rules
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April 2015 Pension Changes Briefing - 9 January 2015
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Proposed rules from 6 April 2015
5. 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 5th 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.
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April 2015 Pension Changes Briefing - 9 January 2015
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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
9th January 2015
Important Information/Risk Factors:
This Briefing is based the proposals set out in the March 2014 Budget and the Autumn Statement 2014. 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.
OakTree Wealth Management Limited
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