Comments are invited on this new draft legislation, which will make the pensions flexibility changes outlined in the Budget 2014, by 3 September 2014.
We reported in our last update on the Government’s response to the consultation on “Freedom and choice in pensions”. Hot on the heels of this response, on 6 August 2014, HMRC published the draft Taxation of Pensions Bill. The Bill will make the changes to legislation outlined below, which are needed to implement the Budget flexibilities announced in March 2014, allowing those aged 55 and above to access their savings in money purchase arrangements as they please, subject to their marginal rate of tax.
The draft guidance states that, for the purposes of the new legislation, a money purchase arrangement is either a cash balance or a defined contribution arrangement.
Comments on the draft legislation are invited by 3 September 2014 and the main provisions in the Bill are intended to come into force on 6 April 2015.
The relevant schedule to the Bill is divided into five parts:
- Drawdown pensions - the minimum income requirement for flexible drawdown is abolished and the annual withdrawal limit under capped drawdown. It also creates the new concepts of the “flexi-access drawdown fund” and the “dependant's flexi-access drawdown fund”. Individuals will be able to make uncapped withdrawals from a flexi-access drawdown fund each year once they have reached normal minimum pension age (NMPA) (or before then, if the ill-health condition specified in the Finance Act 2004 is met). Those who are in capped drawdown arrangements before 6 April 2015 will be able to convert these into flexi-access drawdown.
- Annuities - several reforms to the current annuity rules are introduced, including the removal of the requirement that a lifetime annuity cannot decrease year to year once in payment.
- Pension payments out of uncrystallised funds - individuals over NMPA will be allowed to withdraw an “uncrystallised funds pension lump sum” directly from a DC scheme, 25 per cent of which will be tax free. The remaining 75 per cent will be treated as normal pension income for tax purposes and hence taxable at an individual's marginal rate. Those meeting the ill-health condition will be able to access their funds before NMPA.
- Annual allowances - a new money purchase annual allowance of £10,000 will be introduced for individuals who have entered flexi-access drawdown. The allowance is an anti-avoidance provision designed to prevent individuals obtaining unintended tax advantages by “recycling” pension savings.
- Miscellaneous - provisions are included which introduce the new “permissive override” for schemes, which will be enacted in section 273B of the Finance Act 2004. There is no requirement for employer consent for the exercise by trustees of the permissive override. Nor is there any obligation for schemes to offer any of the flexibilities. However, schemes must allow DC members to transfer uncrystallised benefits to a scheme offering the flexible regime.
In addition, a measure is introduced reducing the earliest age at which schemes can pay a trivial commutation lump sum or small lump sum from 60 to 55. Additionally, from 6 April 2015 a trivial commutation lump sum can only be paid from a DB arrangement, on the basis that the facility will be redundant in DC arrangements.
If the legislation proceeds as drafted, and employer consent is not required to put the new flexibilities in place, trustees wishing to offer the new flexible access will need to consider how the costs of the flexible regime are to be met. Either the employer’s consent will need to be obtained to meet such expenses, or scheme provisions would need to be checked (or amended) to permit members’ accounts to be charged .
Where schemes intend to adopt the full flexible regime in April 2015, consideration should be given as soon as possible to the administrative and rule changes which may be required to implement it.