Its aim was to allow people to plan effectively for retirement. It was felt that too many people found pension planning had become an incomprehensible maze. In particular, the complexities of the current tax rules had made pensions hard to understand, even for experts.
We are now seeing a large part of the “rule book” torn up and the introduction of “freedom of choice” designed to meet the needs of people in the 21st century. However, with this freedom comes temptation. We will have to monitor the new regime to assess whether these changes are a step too far.
The Finance Act 2014 confirmed that from April 2015, soon-to-be retirees will now have:
- greater flexibility to access their pensions;
- more options for small pots;
- new transfer options; and
- innovation in the annuity marketplace.
This article will not consider the full changes, but touches on the temporary changes to help those already “in” or “at” retirement ease towards these new freedoms, which may provide some extra planning opportunities. If applicable, advice should be sought before these options “close” on 5 April 2015.
From 26 March 2014 the following relaxations were introduced:
- Capped income drawdown: The capped income limit goes up by 25% to 150% of the GAD (Government Actuary’s Department) basis limit for the income year starting after 26 March 2014.
- Flexible income drawdown: The minimum income requirement to access flexible drawdown is cut from £20,000 to £12,000 for those wishing to access flexible drawdown from 26 March 2014.
Using capped drawdown, now, allows individuals to take their lump sum and income now, and still keep the options open for 2015. After that date, new capped drawdown will no longer be available, which closes an option we discuss later.
If you are over 60 and have accumulated a small pension pot, the following options are available:
- Triviality rules: If you have total pension savings of £30,000 (previously £18,000) or less you can now take it all as a trivial commutation lump sum, of which 25% is tax free and the remainder tax at marginal rates.
- Stranded pot rules: Small stranded pension pots of up to £10,000 (previously £2,000) can also be taken as a lump sum. The number of small stranded pots that can be taken as a lump sum has also increased from two to three.
These changes when combined can give immediate access to savings of up to £60,000 as a lump sum – it should be noted this may not be the most tax efficient method to access these smaller pension pots.
Protected lump sums above 25%
Individuals with Executive Pension Plans (EPPs) and Section 32 (Buy out/Transfer Plans) that may include entitlements to tax free cash in excess of 25% may need to review their plans for taking benefits.
It is likely many of these contracts will not offer the flexibility to take advantage of the new pension rules and would have needed to enact a transfer, resulting (in most cases) in the loss of the enhanced tax free cash limit – unless a transfer could be made under the “buddy transfer rules”.
An interim measure has been introduced to allow individuals looking to take their benefits soon to transfer to access the new pension freedom without losing any protected lump sum. However, certain conditions need to be met:
- Individuals must be over the age of 55.
- They must transfer all their rights from the old pension in one go.
- The transfer must take place before 6 April 2015.
- All the tax free cash which the individual is entitled to under the pension plan must be taken before 6 October 2015.
Pension contributions: new limits
There have been a number of concerns raised that the new flexibility and current contribution limits could be used to avoid employer and employee national insurance contributions by passing salary through a pension to then be drawn by the individual. Anti-avoidance rules have been introduced to reduce this risk, as follows:
- Those currently in flexible drawdown who have an annual allowance of £0 will now be able to contribute up to £10,000 per annum from April 2015.
- Those who choose to draw more than their tax free lump sum will have their annual allowance reduced to £10,000 per annum (from £40,000).
- Those who are already on capped drawdown before April 2015 will be subject to the £10,000 annual allowance limit when they withdraw more than their capped limit.
- The annual allowance will only apply if an individual accesses a pension worth more than £10,000.
As can be seen, if you are planning to access any pension funds in the near future and still wish to maintain the maximum annual allowance of £40,000 you may need to consider applying for capped drawdown before April 2015, to maintain the maximum contribution flexibility. This is just the tip of the iceberg on financial planning opportunities for pensions from 2015, but highlights that as with most of the new pension flexibility, advice is key to ensure better outcomes and that opportunities are not lost.