Taxation of Pensions Bill: HMRC draft guidance
Paul Evans, pension technical manager, Suffolk Life provides an overview of HMRC’s draft guidance on the Taxation of Pensions Bill
The recently issued draft guidance from HMRC on the Taxation of Pensions Bill offers further detail of the different options for withdrawal from defined contribution funds (including introducing some new terms) from April 2015.
It also explains how accessing funds will affect contribution limits for both defined contribution and defined benefit pensions.
Uncrystallised funds pension lump sum (UFPLS)
A UFPLS is a lump sum paid directly from uncrystallised funds. 25% is usually tax free with the remainder taxed as income. UFPLS will also include payments from money purchase arrangements which would currently be termed as trivial commutation lump sum payments. However, the current trivial commutation rules will remain in place for defined benefit arrangements. UFPLS will be available from 6 April 2015.
To qualify for an UFPLS, an individual must have available lifetime allowance and be aged 55 or over. UFPLS cannot be used by those with protected tax free cash under primary and enhanced protection, as well as some with lifetime allowance enhancement factors.
The minimum age from which trivial commutation and small pot lump sum payments can be taken will reduce from 60 to 55. A trivial commutation lump sum death benefit can also be paid from a guaranteed pension up to a value of £30,000 with effect from the day after the Bill receives Royal Assent.
Flexi-access drawdown (FAD)
FAD is a new term to be applied to current flexible drawdown funds and new drawdown arrangements set up after 6 April 2015. Capped drawdown can no longer be selected, unless the client is able to complete a further designation in an existing arrangement.
There will be no restrictions on the amount of withdrawals permitted from FAD funds. Any individual currently in capped drawdown may convert their fund to FAD with effect from 6 April 2015, in order to make unrestricted withdrawals from their fund. Any capped drawdown policies where this is not selected will retain the current withdrawal limits.
Money Purchase Annual Allowance (MPAA)
A £10,000 annual allowance for money purchase pension savings will apply to individuals who have accessed their pensions savings flexibly from a flexi-access drawdown fund, have received a UFPLS or have received a stand-alone lump sum where enhanced protection is not held. However such individuals who also hold defined benefit savings will retain an overall annual allowance of up to £40,000, depending on the value of new money purchase pension savings used in a given tax year. Once MPAA has been triggered, it will apply to all pensions held by an individual.
Carry forward from earlier tax years cannot be used to increase the £10,000 annual allowance for money purchase pension savings.
As long as capped drawdown policy withdrawals remain below their limit and the policyholder does not request that their fund is converted to FAD, the £40,000 annual allowance is retained and carry forward can continue to be used as normal.
The £10,000 annual allowance will not apply where where an individual is solely receiving a small pot lump sum. If someone is only in receipt of a dependants’ flexible access drawdown and hasn’t met any of the above criteria, the MPAA rules will not apply.
If the capped drawdown income limit is exceeded, the MPAA rules apply immediately and, in cases where the client is midway through the pension input period, only money purchase contributions made after the trigger date will be tested against the £10,000. However, the whole pension input amount will be tested against the full annual allowance.
Lifetime annuities are also seeing some changes from 6 April 2015. The annual level of the annuity will be able to reduce as well as increase in value. The 10-year limit on guarantee periods will also be removed, enabling the choice for the annuity to continue to be paid for however long the annuitant chooses at outset.
Where an individual becomes entitled to a lifetime annuity before the normal minimum pension age and without the ill-health condition applying, the amount treated as crystallised by that annuity at age 55 will be the higher of the annual rate of the annuity multiplied by twenty and the original value of the sums and assets used to buy the lifetime annuity.
As many pension scheme rules will not permit payments to be made using the new flexible access provisions, the Bill will introduce a permissive “scheme rules override”.
For individuals who became entitled to drawdown benefits before 6 April 2006 but have not yet experienced a benefit crystallisation event (BCE), the deemed value of lifetime allowance used at the first BCE will be reduced to 25 times 80% of the maximum drawdown pension payable under that arrangement. This is not the case if funds had been switched to flexible drawdown before 27 March 2014.
While the final situation has yet to be confirmed, the Guidance provides a much clearer framework to use when considering how to prepare clients for the new pensions environment.
The consultation period for these new proposals is open until 3 September 2014 with an expectation that the final rules will be confirmed towards the end of October.