A number of changes to pensions were announced in the Budget. Some of the Budget changes in relation to pensions will take effect on and from 27 March 2014 and others may, subject to consultation, take effect in April 2015.Details of the changes are summarised below.
Currently, benefits payable from a money purchase scheme must come in the form of a scheme pension, lifetime annuity or a drawdown arrangement. Broadly, a drawdown arrangement enables members with money purchase benefits who have reached normal minimum pension age to take benefits via income withdrawal or to buy a short term annuity (payable for no longer than five years). If the member satisfies a statutory minimum income requirement they can use flexible drawdown to do this. Otherwise, they can use capped drawdown. The budget announced changes to the limits for accessing drawdown pensions.
From 27 March 2014, changes to be introduced by the Finance Bill 2014 will:
• Increase the maximum amount which can be taken each year from a capped drawdown arrangement (from 120% to 150% of the value of an equivalent annuity);
• Reduce the amount of minimum income needed in retirement before a member can access flexible drawdown from £20,000 each year to £12,000 each year;
• Increase the amount of total pension saving that can be drawn down entirely as a trivial commutation lump sum from £18,000 to £30,000;
• Increase the small pension pot limit, raising the size of pension pot which can be taken as a lump sum (regardless of total pension saving) from £2,000 to £10,000 and the number of small pension pots that can be taken as a lump sum from two to three; and
• Drop the requirement for members taking their 25% tax free lump sum to purchase an annuity within six months.
From April 2015 and subject to consultation, it is proposed that:
• From the age of 55, members will be able to withdraw the whole of their money purchase pot in one go (with 25% tax free and the remainder subject to the member's marginal tax rate and their pension scheme rules);
• Members with money purchase pots will be offered free and impartial guidance on the options available to them at retirement; and
• Tax rules that prevent individuals aged over 75 from claiming tax relief on pension contributions may be amended or abolished.
In the meantime, trustees and employers will need to consider the extent to which they need to communicate with members about the changes. The proposed changes to be introduced in April 2015 may alter as a result of consultation. However, scheme rules will also need to be reviewed because the drawdown changes, new trivial commutation lump sum and small pot limits will be subject to the wording of the scheme rules allowing them.
For further information please contact Christopher Nuttall on 01604 463134 or click here to email Chris.
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