Pension annuity changes mean you can lump it and like it

Mon 25 Apr 2016

The March 2015 Budget contained the announcement that
“The government will legislate from April 2016 to allow people who are already receiving income from an annuity to agree with their annuity provider to assign their annuity income to a third party in exchange for a lump sum or an alternative retirement product.”
This created the expectation that from 6 April 2016 an individual already receiving annuities would be able to receive the same treatment when swapping their annuity for a lump sum or alternative pension as one who chose not to start drawing their annuity but take a lump sum or alternative pension instead. Under the present law an annuitant receiving such a payment etc. is treated as receiving an unauthorised payment taxable at 55% or more. The Government can point out that to “legislate from April 2016” is not the same as bringing in legislation effective from 6 April 2016 but we are still left to wonder when the process will be completed. The legislation should take effect from 6 April 2017.
Lump-sums subject to income tax
When implemented the change will tax lump sums at the annuitant’s marginal rate of income tax, i.e. at no more than 45%. But the Government is still consulting on the form that the secondary market in annuities is to take. Tax on the lump sum will be deductible under PAYE.
However, the consultation document contains useful information about some of the detail.
Unauthorised payment rules will remain in place but will be overridden where the following conditions are met.
Conditions for lump sums
These are the basic conditions for exemption from the unauthorised payments charge.
• The assignor of annuity rights under a registered pension scheme or pre A-Day scheme must be:
o a person who is receiving, or is due to receive payments under the annuity;
o a person entitled to a dependant’s or other beneficiary’s annuity in respect of the predecessor annuitant; or
o the personal representative of such a person.
• All of the person’s rights under the annuity are assigned.
• The proceeds of the assignment are paid by the insurer who provided the annuity or the assignee of the policy.
• Where the annuity is subject to contingent rights of dependants, the lump-sum is paid to the person who has actual, present rights at the time of payment of the lump-sum.
• The proceeds are paid in a single lump-sum.
• The assignor has reached the age at which the annuity is available (55 for post A-Day policies: lower ages may be provided for under the rules of older policies).
• The assignment is not to a connected person or the employer sponsoring the pension scheme, or as part of a scheme which has tax avoidance as its sole, or a main objective.
Conditions for flexi-access drawdown or purchase of a new flexible annuity
The conditions are the same as for lump-sums apart from these modifications where the annuity is surrendered or assigned.
• On surrender the insurer to whom annuity rights are surrendered applies the proceeds of surrender of all rights under the annuity as either
o consideration in acquiring a new flexible annuity; or
o payment into a flexi-access drawdown fund.
• On assignment the buyer to whom annuity rights are assigned applies the proceeds of surrender of all rights under the annuity as either
o consideration in acquiring a new flexible annuity; or
o payment into a flexi-access drawdown fund that holds no other sums or assets.
Other conditions for flexi-access
The Government intends the treatment of flexi-access funds to be as similar as possible to the current treatment of transferred annuities.
With one exception, where there is a surrender or assignment of rights for a defined benefit (DB) scheme member, dependant, annuitant, nominee or successor to annuity or DB rights the new annuity or drawdown must be for the benefit of the same person.
The exception is that where a lifetime annuity is acquired it may be accompanied by a dependant’s annuity that is payable only on the death of the individual with the actual lifetime annuity. This means that there can only be one successor to rights under the annuity, a move intended to cater for spouses, civil partners, unmarried partners but also enabling a single person to pass benefits down one generation.
Deferred annuities
The holder of a deferred annuity will be able to surrender or assign that annuity for another deferred annuity provided that the replacement deferred annuity cannot pay any benefits before the holder reaches the age of 55.
Surrender or assignment not taxable when conditions are met
If the annuitant does not take a lump sum but surrenders or assigns his rights for flexi-access and all the conditions are met, no tax will be due on assignment or surrender. All sums subsequently received will be subject to tax at the annuitant’s marginal rate unless the unauthorised payment rules are breached with respect to the replacement annuity.
Money Purchase Annual Allowance (MPAA) not compromised by low value surrenders
Annuitants who surrender or assign “low value” annuities purchased before 6 April 2016 will be exempt from the restriction of their pensions annual allowance from the normal £40k to the £10k MPAA. Details of this exemption have yet to be worked out but it will replace the present trivial commutation/small pots rules in relation to surrenders and assignments. (The trivial commutation/small pots rules are expected to remain in place for other lump-sum surrenders).
Lifetime Allowance
Surrenders and assignments in exchange for flexi-access policies that meet the conditions for exemption will not be  benefit crystallisation events (BCEs) and so will not trigger the possibility of a lifetime allowance (LTA) charge. However, the LTA rules will be amended so that any assignment or surrender that is no longer chargeable as an unauthorised withdrawal will be a BCE and may lead to a lifetime allowance charge.
This will apply to all annuities purchased since A-Day but annuities purchased before that date will not be subject to the lifetime allowance charge.
IHT treatment on death
The treatment of flexi-access funds will be aligned with other pension schemes. Lump-sums taken from flexi-access funds will form part of the deceased’s estate but untouched flexi-access funds of annuitants who die before age 75 will be available to pass down IHT-free.
Consultation
The consultation runs until 15 June and will result in draft legislation which should be expected to appear in the draft 2017 Finance Bill.