Taxation of Pensions Bill

Introduction

The Taxation of Pensions Bill (the Bill) was formally published on 14 October 2014.  This follows the publication of a draft of the Bill in August (see our Alert on the Draft Taxation of Pensions Bill).

This Bill is designed to implement the changes to the pensions tax rules first announced in the 2014 Budget (see our Budget 2014 Alert for details), with a view to giving individuals greater flexibility to access their DC pension savings.

In this Alert:

• Key points
• Freedom and choice in 2015: a quick recap
• Abolition of the 55% tax charge on pension funds at death
• Other technical changes
• Next steps

Key points

• The Bill will amend pensions tax legislation to give individuals greater flexibility to access their DC pension savings.
• Additions to the Bill since the August draft include new provisions on the tax treatment of pension funds at death, international pensions and reporting requirements.
• The Government remains on track to introduce the changes from 6 April 2015.

Freedom and choice in 2015: a quick recap

Once in force, the measures contained in the Bill will introduce a wide range of flexibility as to how individuals can use their DC pension savings from the age of 55. The Bill will introduce a permissive “scheme rules override”, which will give trustees or managers of registered pension schemes the option to make any of the new types of payment.

Many of the Bill’s provisions were included in the August draft and have been subject only to minor technical amendments following the consultation process. Key provisions include:

Drawdown pensions

The Bill will introduce a distinction between drawdown pension funds created before 6 April 2015 (to which the current tax rules may continue to apply) and those created on or after that date, to be known as “flexi-access drawdown funds” (“FADFs”). There will be no restrictions on the amount of withdrawals that can be made from FADFs.  All existing funds of those in unlimited drawdown before 6 April 2015 will automatically convert into FADFs.  Anyone who is in capped drawdown on 5 April 2015 will be able to either convert their funds into a FADF, or designate new funds to their capped arrangement.

Uncrystallised funds pension lump sum

The Bill will also introduce a new authorised lump sum payment, the “uncrystallised funds pension lump sum” (“UFPLS”). Subject to certain conditions, this will enable people to access their DC savings flexibly, without first creating a FADF.

Normally, one quarter (25%) of the amount paid under a UFPLS will be tax free, with the remaining 75% taxable as pension income at the individual’s marginal rate of tax. It will not be possible to take a pension commencement lump sum (PCLS) in connection with a UFPLS.

Anti-avoidance: money purchase annual allowance

The AA limits the amount of tax relief available on pension savings paid by or in respect of an individual to a registered pension scheme in any given tax year. In the tax year 2014/15, the AA is £40,000.  Where pension savings exceed the AA, an AA charge applies.

To ensure that individuals do not exploit the new system to gain unintended tax advantages, the Bill will introduce a reduced AA of £10,000 for DC savings. Broadly, the new “money purchase AA rules” will be triggered where an individual flexibly accesses their DC pension savings.

Anti-avoidance: recycling

Recycling of a PCLS involves using that lump sum to increase significantly contributions to a registered pension scheme. From 6 April 2015, the recycling rules will be amended to apply where the value of a PCLS, added to any other such lump sums taken in the previous 12 month period, exceeds £7,500 (rather than 1% of the LTA as at present) – down from £10,000 as provided for in the draft Bill.

Annuities

Changes to the rules for annuities will mean that, from April 2015, there will be no requirement to offer members or dependants the opportunity to select the insurance company which will provide their annuity (known as the “open market option”), although schemes may still offer this. For now, this remains a requirement where the scheme itself provides the pension.

In addition, the maximum ten-year guarantee period for a lifetime annuity will be removed.  This is to enable annuities to continue to be paid after the member’s death.

All annuities will be permitted to reduce as well as increase in value.

Abolition of the 55% tax charge on pension funds at death

The most recently announced flexibility for pension scheme members is the freedom for individuals 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 in the Bill will permit anyone who dies below age 75 to give their remaining DC pension 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 is taken through a FADF.  This does not apply to annuities or scheme pensions.

Those aged 75 or over when they die will be able to pass their DC pension to any beneficiary who will then be able to draw it down, paying tax at their marginal rate.

Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45% (if the deceased was over 75).

Other technical changes

Whilst there have been no major policy changes since the publication of the Bill in draft, HMT has picked up a number of technical amendments that were raised during the consultation process and introduced certain new reporting and information requirements.

Protected pension ages

The Bill now includes provisions that will allow members to retain a protected pension age in conjunction with the new flexibilities.

Individuals who take their benefits before NMPA (currently age 55), using their protected pension age, will be able to transfer their protected benefits that are in payment as part of a recognised transfer. Any payments before age 55 will then be treated as authorised payments.  This will apply to any recognised transfers made on or after 6 April 2015.

Reporting and information requirements

There are a number of new reporting requirements for both trustees / scheme administrators and individuals, to ensure that where an individual has accessed their pension savings flexibly:

• any schemes of which the individual is a member are aware of this
• the individual gets the right information to declare on their self-assessment tax return and calculate the AA charge due, and
• HMRC has sufficient information to ensure the right amount of tax is paid.

International Pensions

Detailed new provisions make changes to the rules for individuals who receive UK tax relief in respect of pension savings in non-UK pension schemes, so that the flexibilities and restrictions to relief will apply equally to them.

Next steps

The Bill will be debated during Parliament over the coming months so the legislation can be finalised ahead of the April 2015 implementation date. During this process, amendments of a technical nature can be expected, but substantive policy changes are unlikely to be made.

Following on from the abolition of the 55% tax charge on pension funds at death described above, the Government also intends to make lump sum payments subject to tax at the individual’s marginal rate (rather than a flat rate charge of 45%). It plans to engage with the pensions industry in order to put this regime in place for the tax year 2016/17.