Make the most of pension reliefs now – further changes likely after general election
Politicians in both parties which make up the coalition have announced proposals to change tax aspects of pensions.
Fri 08 Aug 2014
The legislation to implement the fundamental change to the tax rules for pensions will be a one-off separate act of Parliament, not in a finance act. The new rules have to be enacted well before they take effect on 6 April 2015, hence the Government have been forced to take this unusual step of the Taxation of Pensions Act (TPA).
The policy paper containing the draft Taxation of Pensions Bill was published on 6 August with HMRC requesting comment by 3 September 2014. This timescale would imply enactment of the Bill by the end of this year.
Almost all of the changes that will be made by TPA are to the taxation of pension rules in FA 2004. A few amendments will be made to ITEPA 2003 and to secondary legislation.
The many changes to FA 2004 will affect almost everyone who has a defined contribution (“DC”, or money purchase) pension policy, and will affect some who are members of defined benefit (“DB”, or final salary) schemes.
Changes proposed are to:
An area of avoidance of great concern to HMRC is the possibility that an individual with pension saving taking benefits from their accumulated funds whilst continuing to pay premiums into a pension scheme. HMRC want to deny or restrict tax relief where there is such recycling.
Under current rules there are two anti-avoidance provisions. Both will be changed such that theoretically they will apply in fewer circumstances.
The first provision is the recycling of lump sums that appears in FA 2004 sch 29 para 3A. From April 2015 this will not be triggered if the relevant lump sums are less than £10,000, in place of the current limit of 1% of the standard lifetime allowance.
The second is that where an individual takes flexible drawdown under current rules they lose all entitlement to pension relief (FA 2004 s227A which reduces the annual allowance in s227 to nil). From 2015 the restriction will apply only to DC schemes. Pension inputs to DB schemes will be unaffected by this change: the individual will have their full £40k pa allowance with carry forward of unused relief. An individual taking a flexible drawdown and paying contributions to DC schemes will have a lower limit of allowance broadly if more than £10k is taken flexibly. In these circumstances relief for contributions to DC schemes will be limited to £10k pa which cannot be increased by prior years’ unused relief. The category affected by this will be those who are 55+ years old.
One feature of the new rules that was left hanging was the tax rate that would be applied to payment of funds remaining in a scheme on the member’s death. Although there is no explicit statement on this aspect, the papers published on 6 August state: “The conditions for the payment and the taxation of a flexi-access drawdown fund lump sum death benefit are the same as for the payment of a drawdown pension fund lump sum death benefit.”
Thus the decision is that tax will be charged at 55% as at present on funds remaining that are paid out as a lump sum death benefit.
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