Since George Osborne’s budget announcement earlier this year, we have written a number of articles on the changes that are due to come into effect in April 2015.
The government has now published the updated draft of the Taxation of Pensions Bill, which brings into effect all that was proposed in the initial budget statement.
All measures detailed below will come into operation from 6 April 2015 and be available for those aged 55 or over.
Flexible Access Drawdown (FAD)
This is the new term used for all new income drawdown arrangements first created on or after 6 April 2015. A drawdown arrangement leaves the fund invested, but allows access to an income from it and there will be no restrictions on the withdrawals that can be made from FAD.
Any existing capped drawdown arrangements created before this date will remain subject to the existing rules on limiting withdrawals. Alternatively, you can request that it is converted to FAD and make unrestricted withdrawals going forward if desired.
If you first created a flexible drawdown plan before this date then this will automatically convert to a new FAD on 6 April 2015.
Uncrystallised Funds Pension Lump Sum (UFPLS)
In order to enable people to flexibly access any money purchase arrangements that have not yet come into payment via a drawdown mechanism mentioned above, the new UFPLS will be payable instead. You must have a lifetime allowance available to do so, but UFPLS will not be available if you have already applied for primary or enhanced protection (generally only applicable to those with very substantial pension pots).
75% of each payment will be taxable as pension income at your marginal rate of income tax with the remaining 25% tax free.
The Money Purchase Annual Allowance (MPAA)
A £10,000 annual allowance will apply to any individual who has accessed their pension savings from UFPLS, FAD or an annuity.
It will not be permissible to bring forward any unused allowance from previous tax years in these circumstances, but if you retain a capped drawdown arrangement and have not taken any withdrawals, then the £40,000 annual allowance (subject to earnings) with carry forward facility is still available.
Annuities
All categories of annuities will have the facility to reduce and increase the level of the payment, but this will impact and trigger the MPAA mentioned above.
The maximum ten year guarantee period has been removed for lifetime annuities, which means that they can continue to be paid after the member’s death.
Death Tax
For those under the age of 75 with a drawdown arrangement, they will be able to pass on this pot of money tax free when they die. This is a significant change from current rules, which state that a 55% tax charge will become payable upon death of the policy holder. This also applies to value protected annuities and certain defined benefit scheme lump sums on death.
Finally, in a measure aimed at stopping individuals using tax free payments and recycling them (or putting money back in if you prefer), there is a new limit to be introduced that restricts the amount from tax free lump sums that can be reinvested in any 12 month period to an aggregate of £7,500.
