Two important pieces of pensions legislation, the Finance Act 2014 and the change to the definition of “money purchase benefits”, have recently become law. In addition, today, the Pensions Regulator’s code of practice on funding defined benefits takes effect.
Finance Act 2014
The Finance Bill received Royal Assent on 17 July 2014 and became the Finance Act 2014. The Act contains some of the pensions provisions announced in the 2014 Budget, including:
- the reduction in the minimum income requirement for people who are entering flexible drawdown from £20,000 to £12,000;
- the increase in the capped drawdown withdrawal limit from 120% to 150% of an equivalent annuity;
- the increase in the trivial commutation limit for total pension savings (that is, across all of the member’s registered pension schemes) from £18,000 to £30,000; and
- the increase in the maximum size of a small pension pot which can be taken as a lump sum (regardless of total pension wealth) from £2,000 to £10,000.
These provisions are all backdated to 27 March 2014.
From 19 March 2014, the Act also extends the time-limit for taking an annuity/pension under a pension scheme from within six months of having received a pension commencement lump sum (PCLS) to within 18 months, provided that certain conditions are met. This is so that members will have the option of delaying receipt of pension until April 2015 when the further pension flexibilities announced in the Budget are proposed to take effect.
In addition, the Act introduces a new protection, Individual Protection 2014, following the reduction in the lifetime allowance to £1.25 million on 6 April 2014.
New definition of money purchase benefits
The new definition of money purchase benefits contained in section 29 of the Pensions Act 2011 came into effect on 24 July 2014. This may result in some scheme benefits that had been treated as money purchase benefits having to be reclassified, and treated, as non-money purchase benefits. The schemes most likely to be affected are those which provide some form of promise about the sum of money which will be available at retirement or where the scheme pays retirement income from its own funds. The new definition will have retrospective effect to 1 January 1997 although transitional measures for affected schemes have been introduced at the same time.
On 25 July 2014, the Pensions Regulator published a statement urging trustees to review their scheme’s trust deed and rules and to seek independent legal advice, if necessary, to determine whether the scheme is affected by the change of definition..
Pensions Regulator’s code of practice on funding defined benefits
The Pensions Regulator's revised code of practice No 3, Funding defined benefits, comes into effect on 29 July 2014.