The Chancellor’s Budget contained a number of surprises which seems to have set the industry on a course of major change. The sweeping changes relate mainly to defined contribution (DC) members who, from April 2015, will have complete flexibility as to how to utilise and maximise their pension ‘pot’ once they reach the point of retirement.

Pitmans’ Pensions Team – 2014 Budget Update

The Chancellor’s Budget contained a number of surprises which seems to have set the industry on a course of major change. The sweeping changes relate mainly to defined contribution (DC) members who, from April 2015, will have complete flexibility as to how to utilise and maximise their pension ‘pot’ once they reach the point of retirement.

Highlights

  1. Greater flexibility for DC members

The most significant change, which marks a seismic shift for the industry, is that DC members will have total flexibility in how they access their accrued funds once they reach the age of 55, with the requirement to purchase an annuity or enter a drawdown arrangement removed with effect from April 2015.

DC members will be able to access their retirement pot as they choose, subject to their marginal tax rate. The 25% tax free lump sum will remain in place, but they will be allowed to take the whole pot as one lump sum at retirement, with the excess over the first 25% being subject to their marginal tax rate. Whilst there is no requirement to purchase an annuity, this option will still remain available.

Coupled with this opening up of members’ options over their own pots, a guarantee will be introduced to provide DC members with free and impartial face-to-face guidance on their choices and options at the point of retirement. To ensure this guarantee is delivered, a new duty on pension providers and trust based pension schemes will be introduced. To kick start the initiative, £20m over the next 2 years has been pledged by the Government.

The changes focus on DC schemes, but will have implications for defined benefit (DB) schemes as well. The most likely is that more DB members may be tempted to transfer out of their existing arrangement into a DC scheme to take advantage of the increased flexibility now being offered to DC members. For public sector schemes this could represent a large cost to the taxpayer, given that these schemes are largely underfunded. To combat this, the Government intends to remove the option to transfer for those in public sector schemes, except in very limited circumstances.

  1. Trivial Commutation Lump Sum

From 27 March 2014 the trivial commutation limit will increase from £18,000 to £30,000. Therefore a member, from age 60, can take all of his pension as a tax free lump sum provided that his savings in all registered pension schemes do not exceed the £30,000 threshold. This new rule applies to all trivial lump sum payments made on and from 27 March 2014. This is a transitional change and will apply up until 5 April 2015. Thereafter, the limit will be removed and a member may take the entirety accrued funds as per set out above. 

As things stand, there has been no similar announcement to increase the value of trivial lump sums which can be paid on a scheme wind up. These will remain at £18,000 and no account taken of other pension savings.

  1. Small lump sums

The current position is that modest sized pension pots of up to £2,000 can be paid as authorised payments, regardless of the value of other pension savings. Following the Budget, the limit for such payments has been increased to £10,000, effective on and from 27 March 2014.

The benefit of this change is that trustees of occupational schemes will have far fewer small benefits to administer or buy out, as they can discharge their obligations to all members with benefits worth up to £10,000. Similarly to the trivial commutation lump sums, these new rules are transitional and are only applicable until 5 April 2015. Thereafter the limit will be removed.

  1. Drawdown Rules

The current restrictions on an individual’s capped drawdown stands at 120% of the value of the ‘equivalent annuity’ each year. The 2014 Budget has increased this percentage to 150% for all drawdown pension years starting on or after 27 March 2014. As above, this is a transitional change and only applies until 5 April 2015.

  1. Pensions Liberation

The changes announced in the Budget include a number of steps to help HMRC and the Pensions Regulator prevent pensions liberation. From 20 March 2014 HMRC will be able to refuse to register a scheme (or decide to de-register a scheme) if it believes that it is not established or being maintained as a scheme for the provision of authorised payments. HMRC will also have new powers of inspection of documents and to levy fines for false information provided by scheme administrators and others, when considering an application for the registration of a scheme.

From September 2014 HMRC may refuse to register a scheme if it is of the opinion that the scheme administrator is not a "fit and proper person".

Rules on the surrender of pensions are being changed from 20 March 2014 to close off a loophole used by pensions liberators. The surrender of benefits in favour of a dependant will only be authorised if the new benefits are to be provided in the same pension scheme and the surrender of benefit which creates a surplus payable to an employer will be treated as an unauthorised payment.

  1. Age Changes

The Government has also announced that they are exploring the idea of removing the age 75 limit for individuals to receive tax relief on contributions. This would bring further flexibility to retirement as members would be able to accrue further tax-relieved benefits after age 75.

The minimum pension age may be increased from 55 to 57 at the same time as the state pension age increases to 67 in 2028. The Government has gone further and suggested that the minimum age may be kept within ten years of state pension age.

 The table below summarises the key changes and effective dates discussed above:

Click here to view the table.