Freedom & choice in pensions: Finance Act 2015

Introduction

The Finance Act 2015 received Royal Assent on 26 March 2015.  The Act extends the new rules for taxing pensions and lump sums on death, as announced in the Autumn Statement 2014.

In this Alert

• Key points
• Background
• Annuities for nominees and successors
• Tax free payments?
• Transferring nominees’ and successors’ annuities

Key points

• “Nominees” and “successors” will be able to receive payments of annuities from DC arrangements.
• Such payments will be available tax free, subject to certain conditions being met.
• The new rules apply in respect of deaths on or after 3 December 2014 (the date the measure was announced in the Autumn Statement).

Background

In the Autumn Statement 2014, the Chancellor announced an extension to the new rules for taxing pensions and lump sums on death.  The idea is to put payments from annuities on an equal footing with other options for taking DC benefits on and from 6 April 2015.

The changes made by the Act broadly mirror those made by the Taxation of Pensions Act 2014 in respect of drawdown funds.

Annuities for nominees and successors

From 6 April 2015, new authorised payments will make it possible to pass on DC annuities to a member’s nominees or successors tax free.  This is in contrast to the current position, where death benefits paid as an annuity can only be paid to a member’s “dependant” under the tax legislation.

Nominees’ annuities

A nominee is an individual other than a dependant who is nominated by the member or, in the absence of such a nomination, by the scheme trustees.  However, an individual nominated by the scheme trustees can only be taken into account as a nominee when the member has no dependants and has not nominated an individual or charity in relation to the benefits.

An annuity will count as a nominee’s annuity if it is purchased:

• as a joint life annuity, together with the member’s lifetime annuity, on or after 6 April 2015 or
• after the member’s death, provided the member died on or after 3 December 2014 and the nominee does not become entitled to the annuity before 6 April 2015.

A nominee’s annuity must be payable by an insurance company and be payable until the nominee’s death or until the earliest of their marrying, entering into a civil partnership or dying.

Successors’ annuities

A successor is an individual who has been nominated by a dependant, nominee or successor of a member (“the beneficiary”) or, in the absence of such a nomination, by the scheme trustees.  However, an individual nominated by the scheme trustees can only be taken into account as a successor when there is no individual or charity nominated by the beneficiary in relation to the benefits.

A successor’s annuity can only be payable where the beneficiary dies on or after 3 December 2014 and the successor becomes entitled to it on or after 6 April 2015. The annuity must also be purchased using undrawn funds and be payable by an insurance company until the successor’s death or until the earliest of the successor’s marrying, entering into a civil partnership or dying.

Tax free payments?

A key element of the new provisions is that annuities can be passed on to a member’s beneficiaries tax free in certain circumstances.  Broadly:

Dependants’ or nominees’ annuities

These can be paid tax free where the member dies on or after 3 December 2014 but before reaching age 75, and no payment was made to the beneficiary in question before 6 April 2015 in connection with the annuity.

Such an annuity can be purchased together with a member’s lifetime annuity or by using undrawn drawdown funds or unused uncrystallised funds.  If the annuity is purchased using uncrystallised funds, the entitlement to the annuity must arise within two years beginning with the earlier of the day on which the trustees first knew of the member’s death and the day on which they could first reasonably have been expected to know of the member’s death.

Using uncrystallised funds to purchase an annuity in these circumstances, will also trigger a test against the LTA (see below).

Successors’ annuities

Successors’ annuities can be paid tax free where the beneficiary dies on or after 3 December 2014 but before age 75, and no payment is made to the successor before 6 April 2015 in connection with the annuity.

Test against the LTA?

The Act introduces a new benefit crystallisation event – BCE 5D – which triggers a test against a member’s available LTA where the member dies on or after 3 December 2014 and the annuity to which a dependant or nominee becomes entitled on or after 6 April 2015 is purchased using “relevant unused uncrystallised funds” (namely, funds which have not previously been tested against the LTA).

Transferring nominees’ and successors’ annuities

In connection with the new provisions, HMRC has published The Registered Pension Schemes (Transfer of Sums and Assets) (Amendment No. 2) Regulations 2015 in draft for comment.

The draft regulations provide that nominees’ and successors’ annuities may only be transferred to another nominees’ or successor’s annuity respectively, issued by a different insurer.  If they are transferred to any other type of annuity or pension arrangement, the sums or assets transferred will be treated as unauthorised payments liable to tax charges of up to 55%.

The idea is to ensure that such annuities will be treated in the same way as current dependants’ short-term annuities, as well as nominees’ and successors’ short-term annuities, and to protect against unintended manipulation.

Consultation on the draft regulations closes on 19 May 2015.  However, the regulations are expected to have effect for any transfers on or after 6 April 2015.