Pension reforms in the Autumn Statement 2014

Introduction

Still dealing with the fallout from the Chancellor’s announcements in the 2014 Budget, the UK pensions industry gave an audible sigh of relief on learning that, at least for the time being, George Osborne has no additional major news for workplace pensions.

The Autumn Statement 2014 which was delivered on 3 December 2014, heralds little in the way of new developments. This gives the Government and schemes at least some room to focus on the new flexibilities for pension savings that are already in train.

In this Alert:

Key points
Freedom and choice in 2015: a quick recap
Abolition of the 55% tax charge on certain benefits at death
Other measures confirmed
Next steps

Key points

The Autumn Statement largely confirms the Government’s plans to introduce significant flexibility for pension savers from April 2015.
In particular, the abolition of pensions tax charges on death is confirmed and an additional benefit announced, with joint life or guaranteed term annuities also set to be passed on tax-free where an individual dies under age 75.
Following informal consultation since the 2014 Budget, the Government has decided not to change the age limit at which tax relief can be claimed on pension contributions. This will remain at age 75.
It has been announced that, for those who qualify for the full pension, the new flat rate state pension will be at least £151.25 a week when it is introduced in April 2016, although the actual amount will be set in autumn 2015.

Freedom and choice in 2015: a quick recap

The Taxation of Pensions Bill 2014-15 (the Bill), which is currently before Parliament, will introduce new ways in which individuals can use their DC pension savings from the age of 55. The Bill is designed to implement the changes to the pensions tax rules that were first announced in the 2014 Budget, with a view to giving individuals greater flexibility to access their DC pension savings.

Abolition of the 55% tax charge on certain benefits at death

On 29 September 2014, the Chancellor announced that individuals would be free to pass on their unused DC pension to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pensions passed on at death.

New provisions which were first included in the Bill on 21 November 2014 will permit:

individuals who die below age 75 to give their remaining DC benefits to anyone completely tax free, whether it is in a drawdown account or untouched, as long as it is paid out as a lump sum or taken through a flexi-access drawdown fund
those aged 75 or over when they die to pass their DC benefits to any beneficiary who will then have the choice between drawdown (paying tax at their marginal rate) or a lump sum payment (subject to a tax charge of 45%).

As announced in the Autumn Statement, the new provisions will also now apply to the beneficiaries of individuals with a joint life or guaranteed term annuity:

where the individual was under age 75 at death, any future payments from such policies will be payable tax free, provided that no payments have been made to the beneficiary before 6 April 2015
for individuals aged 75 or over at death, the beneficiary will pay tax at their marginal rate or, if the funds are taken as a lump sum, a tax charge of 45% will apply.

The intention is to tax lump sum payments at the beneficiary’s marginal rate from the tax year 2016-17 onwards.

The new tax provisions on death will not apply to scheme pensions.

Other measures confirmed

In its response to the consultation on freedom and choice in pensions (published on 21 July 2014), HMT announced a number of additional measures which have been confirmed in the Autumn Statement. These include:

Transfers from funded DB schemes to DC schemes will continue to be permitted. This will allow DB scheme members to transfer out if they want to take advantage of any of the new flexibilities. A DB scheme member wishing to take a transfer for this reason will be required to take professional independent financial advice from someone who is authorised by the FCA.
A reduced annual allowance of £10,000 for DC pension contributions for individuals who have flexibly accessed a pension from 6 April 2015.
Flexibility for small pots: From 6 April 2015, individuals who take a small lump sum of up to £10,000 from their DC benefits will not be subject to the reduced annual allowance of £10,000 on future DC contributions. Subject to certain conditions being met, such a lump sum can already be taken on up to three occasions from non-occupational pension schemes, or on an unlimited number of occasions from occupational schemes. The age from which an individual can take advantage of these rules will be lowered to 55 (from age 60) from 6 April 2015.

Next steps

The Government still has a lot of work ahead before the new flexibilities come into force in April 2015. Alongside the Taxation of Pensions Bill, the Pension Schemes Bill will introduce the “guidance guarantee” and other non-taxation elements of the new flexibilities. See our DC Briefing for details of the guidance guarantee and new legal requirements for DC schemes.

As much of the detail is expected to be included in regulations, which are unlikely to be seen in draft until the New Year, schemes wishing to take advantage of the new regime will have little time to prepare.

Given the wide media coverage which followed the 2014 Budget announcement – with talk of pensions as bank accounts and long waiting lists for Lamborghinis – trustees will need to manage members’ expectations carefully and be clear as to which, if any, of the new flexibilities will be made available from their pension scheme.

If you have any questions, please speak to your usual Sackers’ contact.