The Taxation of Pensions Bill received its second reading in the House of Commons on 29 October 2014. This briefing considers the implications of these significant reforms to the tax treatment of defined contribution (DC) pensions.
Background: 2014 Budget
In the 2014 Budget brought down on 19 March, HM Government announced some fundamental changes to the tax regime governing registered pension schemes, which will transform the way in which individuals can access their pension savings. The central change was the abolition of the requirement to use DC pension funds under registered pension schemes to purchase an annuity, allowing scheme members flexibility as to whether to take their benefits in cash, under a drawdown arrangement or to purchase an annuity, or a combination of such approaches (our briefing on the implications of the Budget announcement is available here). In September 2014, the Chancellor reinforced this emphasis on flexibility of access by announcing changes to the taxation of benefits under registered pension schemes following the death of a pensioner.
The Bill will make the changes to the legislation governing the taxation of pensions that are needed to implement the Government’s new policy. The changes will have effect from 6 April 2014.
Overview of changes
The changes are as follows:
Click here to view the table.
Registered pension schemes will not be required to offer members all of the new options envisaged in the Bill (e.g. it is not compulsory to offer a flexi-access drawdown fund to members or to permit payment of benefits a UFPLS). Administrators and trustees of certain schemes may not feel as equipped to offer the full range of options given the administrative burden this could involve.
By contrast, insurance companies providing pensions are likely to be motivated to offer a range of new products in response to the changes.
Recent and up-coming developments affecting the Bill
At the second reading of the Bill, the House of Commons discussed HM Government’s more recent proposals to amend the Bill to change the tax charges on death benefits paid over age 75. It was also suggested in the debate that criminal sanctions for the provision of unregulated advice may be introduced to the Bill at the committee stage.
The changes to be made by the Bill will need to work in tandem with amendments to pensions legislation to be introduced by the separate Pension Schemes Bill, which received its second reading in the House of Commons on 2 September 2014, as well as existing pensions legislation – notably, the definition of money purchase benefits, as amended by the Pensions Act 2011.
Next steps for employers and trustees
Trustees or managers of existing money purchase pension schemes will need to decide whether they will offer all of the options for accessing benefits provided for under the new regime. While scheme trustees will have the ability to offer such options without an amendment to the scheme rules, we expect that many may be uncomfortable with the idea of doing so without agreeing on an approach with the scheme employer and documenting that approach in detailed rule amendments. Having decided how much flexibility they will offer members, they will then need to prepare to comply with the new taxation regime and information requirements from 6 April 2015.
Sponsoring employers and trustees or managers of money purchase pension schemes will need to engage with each other as soon as possible to determine how much flexibility to offer members in light of the new regime. Implementing the changes will also require preparation ahead of 6 April 2015. For instance, trustees and managers will need to have communications ready to provide information to members within 31 days from when they access their pension rights flexibly under the new regime. Employers and trustees or scheme managers should also remain aware that the requirements to provide information, together with the requirements in the Pension Schemes Bill to provide guidance to members, have been subject to considerable scrutiny in the House of Commons and may be subject to further amendment before the Bill is enacted.
Trustees or scheme managers should also be considering whether they should adjust the investment profile of their schemes to reflect the different choices members will be making regarding when, and how, they access their pension savings. Current strategies may no longer be appropriate if fewer members decide to purchase annuities or use scheme pensions and decide to take lump sums or drawdown their pension savings instead.
Impact on UK life insurers
The flexibility for accessing pension benefits will also have a considerable impact on UK life insurers, for whom the provision of annuities forms a significant part of their business. Although there is scope for development and innovation of new retirement investment and drawdown products, the uncertainty surrounding the annuities market is one of the key challenges facing this industry.