Freedom and choice in pensions – update on Government thinking

Mon 28 Jul 2014

HM Treasury have issued a paper giving an update on aspects of the radical reform to the pension tax rules, announced in the Budget that will take effect in April 2015.  It also covers ramifications such as the way that scheme members and schemes will receive fair unbiased advice.

This note concentrates on news that will affect the tax liability and decisions of members of schemes.

Rate of tax on funds at death

The Government states that there is general agreement that the 55% tax charge on funds remaining in a scheme at the death of a member (e.g. one who is taking drawdown) is too high.  However “this is a complex area and any changes have the potential for unforeseen and unintended consequences” so the Government will not announce changes to the structure and rate of charges until the Autumn Statement, expected to be in December 2014.

Members of defined benefit (final salary) schemes

Members of DB schemes can currently request a transfer payment from the DB scheme to a personal pension scheme (PPS) at any time before they start to draw benefits.  The proposal is that going forward transfers to PPSs will be permitted from private sector schemes and funded public sector schemes (e.g. Universities Superannuation Scheme).  The Government is also consulting on removing the need to transfer into a PPS first, for those DB members who want to access their savings flexibly. Members of unfunded public sector schemes will not be permitted to transfer to a PPS because the Government would have to fund such transfers immediately, increasing Government borrowing, an aspect that weighs heavily on the Government.

DB scheme members will continue to be able to cash in ‘small’ pension pots, worth no more than £10k regardless of income and may also be able to take lump-sums of up to £30k out of a larger pot.

Anti-avoidance will target lump-sum abuses

Measures to be announced in the Autumn Statement to prevent the new rules from being exploited to achieve tax advantages that are not intended. The document states at 2.27 ‘If the government were to take no action, an individual over the age of 55 could divert their salary each year into their pension, take it out immediately and receive 25% of it tax free, thus avoiding  income tax and NICs on their employment income.’

Continuing pension contributions after a lump-sum has been taken

A person who has already drawn down more than their tax free lump-sum will be able to receive tax relief on contributions but only up to a new annual allowance of £10k per year.  However, this annual allowance will only apply where the individual accesses a DC pension pot worth more than £10k.

Further consultation

Many of the issues are mentioned not so much to set policy as to give a direction of travel.  In pensions the detail will be vital and the Government will continue to work with “stakeholders and partners” to flesh out the rules.  It is apparent that the final form will only be confirmed in the Autumn Statement.