The Government has published a draft Bill on the taxation of pensions and has produced a draft explanatory note and draft HMRC guidance on the Bill's provisions. The Bill is subject to a consultation which will end on 3 September 2014.
The Bill follows the Government's consultation entitled "Freedom and Choice in Pensions" and is intended to implement the defined contribution (DC) pension flexibilities which were announced by the Government in the Budget on 19 March 2014. It does so by amending the legislation to widen the authorized pension benefits which can be provided by DC schemes (or DC arrangements in hybrid schemes). The key changes which would apply from 6 April 2015 are as follows:
- benefits in DC arrangements can be accessed when members wish (including if they wish to access all benefits immediately at age 55), without being subject to higher tax charges which might previously have applied in certain situations;
- however, where members or beneficiaries decide to take advantage of these flexibilities, they will subsequently be subject, in relation to any future pension savings, to an annual allowance for funding their money purchase arrangements of GBP10,000, in order to ensure that unintended tax advantages cannot be obtained;
- income drawdown will become more flexible (funds under the new regime will be known as "flexi-access drawdown funds"), as the cap on withdrawals, and the minimum income requirements for all new drawdown funds will be removed, and existing drawdown funds will be able to be converted to take advantage of the flexibilities;
- payments from DC arrangements can be made directly from pension savings, with 25 percent of the payment being tax free (rather than needing to take a single pension commencement lump sum);
- a number of the existing restrictions on lifetime annuity payments will be removed; and
- the maximum value of trivial commutation lump sum death benefits will be increased from GBP18,000 to GBP30,000.
The changes will not automatically override scheme rules, but schemes will be able to choose whether and how to adopt the changes. The Bill introduces provisions which will grant trustees and managers a limited right to make payments of benefits flexibly from money purchase savings (if they wish to do so), notwithstanding any contrary provision of their scheme rules. We also note that the Freedom and Choice in Pensions consultation response document confirms the Government's intention to change the normal minimum pension age from 55 to 57 from 2028. The draft Bill can be viewed by clicking here, the draft explanatory note setting out a summary of the Bill's provisions can be viewed by clicking here, and the draft HMRC guidance can be viewedhere.