flexi-access, money purchase and
Roderick Ramage, solicitor, www.law-office.co.uk
published by distribution to contacts on 31 December 2014
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
The Taxation of
Pensions Act 2014 implements the 2014 Budget proposal
to enable members to access their money purchase pension
savings as they wish.
The new regime applies to all registered money purchase pension
schemes, whether occupational or personal, and, from 6 April 2015, will allow
members aged 55 and over to use their pension funds in all or any of the following
ways or any combination of them:
pension commencement lump sum;
(but only if started before 6 April 2015) capped drawdown;
flexible access drawdown, which can include the whole of the member’s
fund as one or more taxed authorised lump sums; and
(g) uncrystallised funds
lump sum payments.
Items (f) and (g) are new, and there are alterations to (a) to (e),
in particular (c). There are
corresponding pension and annuity rights for dependents.
flexible access drawdown
A person whose pension commencement date is on or after 6 April
2015 may take his or her pension commencement lump sum (PCLS) tax free as at
present. He or she may designate all or part
of his or her pension fund as a flexi-access drawdown fund (FADF) and draw all
or part (or none) of it as taxable income.
If no more than the PCLS is drawn, the member’s annual allowance (AA)
remains £40,000, but if any income is drawn the AA is reduced to £10,000.
A person who is already in capped drawdown or flexible drawdown may
convert his or her fund to an FADF.
uncrystallised funds lump sum payments (UFLSPs)
A person who wished to a tax free lump sum, not exceeding 25% of
his or her fund, without creating a FADF, may do so as a UFLSP, but cannot take
a PCLS in connection with it. Taking a
UFLSP does not affect the member’s AA.
death of member
A member who dies under age 75 may leave his or her pension fund
tax free to anyone in the form of an FADF.
A member who dies aged 75 or older may leave his or her pension to
anyone, who may draw it as taxable income or take it as a lump sum taxable at
45%, which is expected to be changed to the beneficiary’s marginal tax rate for
2016/17. The former 55% tax charge will
serious ill health lump sum
The tax charge on this sum is reduced to 45%.
pension scheme rules
Trust deeds and rules may be changed to reflect the law, but rule
changes are not essential, as the trustees or managers of pension schemes have
overriding powers to pay drawdown pensions, purchase short term annuities and
pay associated lump sums, even if prohibited by the scheme rules.
commutation and small pension pot
Following the 2014 Budget with effect from 27 March
2014, the FA and ToPA 2014 increase the limits and
alter the conditions (mainly by altering the Finance Act 2004 sch 29 paras 7
and the new 7A and the new reg 11A in SI 2009/117). Two separate kinds of commutation to
extinguish all pension rights are available to a pension scheme member at
normal pension age or if the ill-health condition is met.
(a) One or more lump sums
if the value of his or her pension savings across all schemes does not exceed
£30,000 (up from £18,000) and they are all paid in a period of twelve months.
(b) In addition a member
may commute up to three “small pots” not exceeding £10,000 (up from £2,000)
each, regardless of the value in other schemes, but must do so in connection
with and not more than one month after the payments of each scheme’s PCLS.
The Pensions Act 2011 s29 altered the definition of
money purchase benefits (the Pension Schemes Act 1993, sections 181 and 181B)
with effect from 1 January 1997, but transitional provisions (SI 2014/1711)
protect transactions undertaken before 24 July 2014, when the section was
brought into effect. The essential
result of the new definition is that a money purchase scheme cannot have a
deficit because the benefits must match the assets. The benefits mainly affected by the new
definition are the guarantee of any amount or rate of the fund while it is
being accumulated and the provision of a pension out of the scheme, instead of
securing it by the purchase of an annuity from an insurance company. The main consequences of providing benefits
which are not now money purchase are:
(a) the need to appoint
(b) detrimental changes
become protected modifications under s67 of the Pensions Act 1995;
(c) a levy will have to
be paid to the Pension Protection Fund:
(d) the scheme will have
to comply with the statutory scheme specific funding obligations in the
Pensions Act 2004; and
(e) a deficit in respect
of these benefits can be liable to a debt under s75 of the Pensions Act 1995.
Contracting-out will cease on 6 April 2016, when S2P
will be merged with the State Basic Scheme into the new single-tier State
pension. The immediate cost implications
for both employers and employees is that their NICs will increase for employers
by an additional 3.4% of relevant earnings and by employees an additional 1.4%:
relevant earnings are earning between the primary threshold (£149 a week) and
the upper accrual point (£770 a week).
The Pensions Act 2014, s24 and sch 14, give
the employer power, exercisable for five years from 6 April 2016 to alter
scheme’s contributions or benefits to offset the increased NICs.
Another consequence is that a contracted out scheme
will no longer be a qualifying scheme for automatic enrolment (AE). Members of a contracted out scheme on 6 April
2016 will cease to be in a qualifying scheme, and employers will have to alter
the formerly contracted-out scheme to meet the test scheme standard, offer
membership of another qualifying scheme or enrol them into an AE scheme.
copyright Roderick Ramage
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