The UK Government’s spring budget has signalled its intent to dramatically reform the way in which members of UK registered pension schemes take benefits.
The key message from Chancellor George Osborne is flexibility; Budget 2014 announces “radical reforms to give people greater freedom over how they access their pension savings and to support savers at every stage of their lives”. These reforms will radically overhaul the UK Defined Contribution pension market as the UK Government “introduce the most fundamental reform to the way people access their pensions in almost a century by abolishing the effective requirement to buy an annuity”.
Members of personal pension schemes, like Self-Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSAS) will have greater flexibility over how they “access their pension, and will support savers to make the long-term decisions that ensure they can benefit from a better and more secure financial future”.
Summary of Key Points
We have summarised the key announcements and assessed the impact that these will have on pension savers.
Effective from 27th March 2014
- Increase Capped Drawdown limit from 120% to 150% of an equivalent annuity, for all drawdown pension years starting on or after 27th March 2014
- Reduced Flexible Drawdown minimum Income requirements from £20,000 to £12,000
- Increase from £18,000 to £30,000 the total pension wealth that people can have under trivial commutation rules.
- Increase of the small pension pots limit, raising the size of a pension pot that can be taken as a lump sum from £2,000 to £10,000
Effective from April 2015
- From Age 55, full withdrawal of pension fund (after 25% tax free lump sum) permitted and taxed at marginal rate of income tax, rather than current rate of 55%
- Providers of Defined Contributions pension schemes will have a duty to provide free and impartial face-to-face guidance at retirement to their members.
The Government have also announced consultations to amend legislation to the current tax rules that apply to pensions upon death. They believe that the 55% tax charge is too high and will engage with stakeholders to review these rules.
As a result of the government’s plan to increase the flexibility of Defined Contribution pension schemes, they have announced restrictions on the portability of public sector Defined Benefit (Final Salary) pensions and will therefore legislate to remove the option to transfer benefits away from these schemes. Whilst they have said that in principle they wish to extend greater choice for members of defined benefit schemes in the private sector, they are yet to announce what this will be.
The Government will also legislate to provide Her Majesty’s Revenue and Customs broader powers to prevent pension liberation with greater control over the registration and de-registration of pension schemes. The legislation will provide immediate effect of these powers from 20th March 2014.
The Government will consult on ways to give equivalent treatment to QNUPS (Qualifying Non-UK Pension Schemes) and UK registered pension schemes to remove opportunities to avoid inheritance tax.
What does this all mean?
The increase in the capped drawdown limit from 120% to 150% of an equivalent annuity, will only really be relevant to members already in drawdown, or plan to commence drawdown between 27th March 2014 and April 2015. For members that are already in drawdown, the increase will not be effective until their next pension income anniversary.
From April 2015, all members in a Defined Contribution scheme will be able to access their entire pension from Age 55. This also includes those already in a pre-existing drawdown arrangement. Individuals will have the option to select the level of income they choose to receive and will be taxed at their marginal rate.
For those of pension age who do not want to wait until April 2015 to access their defined contribution pension fund, the Chancellor has reduced the minimum secured income requirement for Flexible Drawdown from £20,000 to £12,000. Therefore should a member be in receipt of a secure pension (i.e. state pension in payment, annuity, final salary pension) of at least £12,000, they can select an uncapped income of their choosing, which will be taxed at their marginal rate.
At Carlton Smith Private Wealth, we welcome the announcements made by the Chancellor in the spring 2014 budget. The Government have excelled in ensuring much greater flexibility and choice available for members of Defined Contribution pensions and view this as a simple grown up approach to retirement planning.