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2014 Budget: key pensions announcements
Practical Law UK Legal Update 3-561-4865 (Approx. 8 pages)
2014 Budget: key pensions announcements
| Published on 19 Mar 2014 • United Kingdom |
On 19 March 2014, the Chancellor of the Exchequer delivered his Budget speech. This update summarises the pensions-related implications.
Speedread
The majority of the tax restrictions on how a member of a defined contribution pension scheme can draw their benefits are to be removed following widespread changes announced as part of the 2014 Budget. The Chancellor of the Exchequer announced that from April 2015 members at normal retirement age will be able to access their pension fund in full without the need to purchase an annuity. They will be taxed at the marginal tax rate, rather than the 55% rate currently applied. Transitional measures to allow immediate flexibility, primarily by increasing the maximum annual capped drawdown pension limit to 150% and increasing commutation limits, will take effect from 27 March 2014. A wider consultation on the changes was also launched, including proposals to raise the normal minimum pension age to 57 in 2028. Also announced were wider powers for HMRC to combat pension liberation schemes including introducing the requirement, from 1 September 2014, that any scheme administrator must be a "fit and proper person", and that HMRC may de-register a scheme where it appears that the main purpose is not to provide authorised benefits.
The Chancellor of the Exchequer gave his 2014 Budget speech on 19 March 2014. He announced major changes to the way that members of defined contribution (DC) pension schemes can access their pensions savings. The changes represent a significant shift away from the requirement that a member purchase an annuity and a relaxation in the tax charges that are applied to the withdrawal of funds by members. The changes come in two parts. Transitional changes will be introduced on 27 March 2014. The wider changes, due to come into force in April 2015, will be the subject of a consultation exercise until 11 June 2014.
Changes from 27 March 2014
The changes to increase the flexibility for members accessing their DC pension savings will be included in the Finance Bill 2014 and will amend the Finance Act 2004. These will be transitional changes, in advance of "more radical reforms" in April 2015, and will take effect from 27 March 2014. They are as follows:
- There will be an increase in the maximum annual withdrawal cap, which limits the amount a member who has opted for capped drawdown can withdraw each year, to 150% for all pension years starting on or after 27 March 2014. This will be subject to the pension scheme's rules permitting such payments. The changes will be made to section 165(1) of the Finance Act 2004. For more information on drawdown pensions see Practice note, Drawdown pension arrangements.
- The amount of the lump sum that can be paid under the "all-schemes" trivial commutation regime will be amended to allow trustees of defined benefit (DB) and DC schemes to commute a member's benefits provided his total benefits in all registered pension schemes do not exceed £30,000. This is an increase to the current £18,000 lump sum that can be paid.
- The small pot limit, which is part of the commutation regime that allows schemes to commute small benefit rights for lump sums in certain circumstances, will be increased from £2,000 to £10,000. In addition, the maximum number of DC pension pots that can be commuted in this way will rise from two to three.
These changes will require amendments to the Registered Pension Schemes (Authorised Payments) Regulations (SI 2009/1171). For more information on the circumstances in which such sums can be paid, see Practice note, Pensions tax: authorised lump-sum payments.
- The minimum income requirement for flexible drawdown will drop from £20,000 to £12,000. This is the minimum level of income that a member must have from other sources before he can take advantage of flexible drawdown, meaning there are no limits on annual withdrawals. For more information on flexible drawdown, see Practice note, Drawdown pension arrangements.
(HM Treasury: Budget 2014, paragraphs 1.164 and 1.165.)
Other pensions changes
Amongst the other changes mentioned in the Overview of Tax Legislation and Rates are:
- Qualifying non-UK pension schemes (QNuPS). The government will consult on ways to give equivalent treatment to QNUPS and to UK registered pension schemes, "to ensure fairness and remove opportunities to avoid inheritance tax". Legislation is to be introduced in the Finance Bill 2015. (Chapter 2.2.)
- Abolition of the age 75 rule. The government will explore with interested parties whether the tax rules that prevent individuals aged 75 and over from claiming tax relief on their pension contributions, should be amended or abolished. (Chapter 2.3.)
- Dependants' scheme pension. A consultation will be carried out on options to simplify the dependants' scheme pension rules, to ensure the rules apply fairly, and reduce administrative burdens. Any legislative changes will be in a future finance bill. (Chapter 2.6.)For more information on the current position, see Practice note, Pensions tax: authorised pension payments: Dependant's scheme pension.
Consultation on future changes
In addition to the transitional changes which will take effect from 27 March 2014, the government has published the consultation document, Freedom and choice in pensions. This sets out further proposals for reforms, going beyond those relating solely to increase flexibility for members. The proposals are for significant changes to the current structure of pension benefits, and the administration of pension schemes. The consultation closes on 11 June 2014.
Full fund withdrawal at retirement
The government intends to change the current system of taxation so that, from April 2015, members of DC schemes will be able to access their pension fund in full without the need to purchase an annuity. They will be taxed at the marginal tax rate, rather than the 55% rate currently applied.
Members will be able to draw on their pension savings "whenever and however they wish after the age of 55". There will be no requirement to choose a particular product to access the member's fund. Individuals will be able to choose how they wish to manage the payment, either as a lump sum or through some sort of financial product. The government has asked for views on whether a statutory override should be put in place to ensure that scheme rules do not stop individuals from taking advantage of the increased flexibility. (Freedom and choice in pensions consultation document, Chapter 3.)
Access to free financial advice
As part of this change the government wants to ensure that all individuals making the decision on how to draw their fund have access to good quality, free and impartial, face-to-face advice. A new "guidance guarantee" will be introduced so that all individuals with a DC pension approaching retirement will be offered advice to assist their decision-making. A new duty on pension providers and schemes to deliver this guarantee will be introduced by April 2015. The Financial Conduct Authority has also been asked to ensure the guidance meets "robust standards". The government will provide funding of £20 million to get the initiative "up and running". No further details are given on how costs will be met once this funding is exhausted. (Freedom and choice in pensions consultation document, Chapter 4.)
Increase in normal minimum pension age
Currently, the minimum age that most members are able to access their pensions savings is 55. As part of the consultation on the new flexibility on members taking their pension benefit, a new proposal would allow individuals to do so from age 55 in all circumstances, with the normal minimum pension age rising to 57 in 2028. This is in line with the increase in the state pension age to 67. In some situations this would allow people to take their pension savings earlier than currently possible. (Freedom and choice in pensions consultation document, paragraph 3.29).
Taxation of pension fund on member's death
The government considers that the current 55% tax charge for pension funds held at death for those under age 75 and aggregate tax charges of up to 82% for those over age 75 need to be reviewed to ensure they are appropriate under the new flexible access regime. It considers that the flat 55% rate will be too high in many cases given that everyone with DC pension savings will now have the freedom to enter into drawdown rather than take an annuity. (Freedom and choice in pensions consultation document, paragraphs 3.16 and 3.17).
Prohibition on DB to DC transfers
The new flexible DC scheme benefit regime will offer much greater flexibility than that available to DB scheme members. Although the current poor funding level of many DB schemes could deter members, some may be inclined to accept a reduction in their transfer value as a trade off for increased flexibility. This is recognised in the consultation document which states that the government intends to “proceed with caution” in extending the same flexibility to DB schemes, and that a large scale transfer “could have a detrimental impact on the wider economy”. Although the issue is part of the consultation the document makes clear that the government’s starting position will be legislating to remove the right of all members of DB schemes to transfer to a DC scheme, except in exceptional circumstances. (Freedom and choice in pensions consultation document, Paragraphs 5.9 to 5.18.)
For public sector pension schemes, the majority of which are unfunded, the government intends to introduce legislation to remove the option to transfer from a public service DB scheme to a DC scheme, except in "very limited circumstances" as proposed with public service DB schemes. Initial government estimates suggest that the net cost of 1% of public service workers transferring out of public service schemes each year would be £200 million. (Freedom and choice in pensions consultation document, paragraphs 5.6 and 5.7.)
New pension liberation powers for HMRC
The government has published a new guidance note, Combating Pension Liberation, Changes to Finance Act 2004, and a new tax information and impact note (TIIN). HMRC will be given new powers to tackle the growing threat of pension liberation fraud, building on the changes made to its processes on 21 October 2013 (see Legal update, Pension liberation: HMRC changes registration and transfer processes).
For more information on pensions liberation, see Practice note, Pension liberation schemes.
With effect from 20 March 2014, changes will be made by amendments to the Finance Act 2004 to allow HMRC to de-register pension liberation schemes, as well as prevent new pension liberation scheme from registering. There will be a new requirement that the main purpose of a pension scheme must be to provide authorised benefits. Amongst its new powers HMRC will be able to:
- Send information notices to the scheme administrator and other persons, in order to help it decide whether or not to register the scheme.
- Enter business premises to inspect documents, in order to help it decide whether or not to register a pension scheme.
- Refuse to register a pension scheme, or de-register a scheme, where it appears to HMRC that the main purpose of the scheme is not to provide authorised benefits.
- Issue penalties for providing false information or a false declaration in connection with a registration application of up to £3,000.
From 1 September 2014, it will be an HMRC requirement that a scheme administrator of a registered pension scheme must be "a fit and proper person" to be the scheme administrator. New powers to enable HMRC to police this requirement include:
- The power to enter business premises to inspect documents, in order to help HMRC decide whether the scheme administrator is a fit and proper person.
- The ability to refuse to register or to de-register a pension scheme where it appears that the scheme administrator is not a fit and proper person,
Scheme administrators, appointed during an intervention by the Pensions Regulator, will not become liable for certain tax liabilities incurred before they were appointed. The previous scheme administrator will instead retain liability for these tax charges. This will include independent trustees appointed by the High Court or the Pensions Regulator.