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Pensions - Key Budget issues

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19 March 2014
The Chancellor has announced far reaching reforms to pensions and said "no one will have to buy an annuity" in the future.  The measures relate to defined contribution schemes, with defined benefit schemes being considered in the future.
 
  • The Lifetime Allowance and Annual Allowance are set to remain in place.
  • The minimum income requirement in order to apply for “Flexible Drawdown” has reduced from £20,000 gross per annum to just £12,000 gross per annum. This will provide more flexibility for a larger number of individuals who wish to have greater control over their pension income. Flexible Drawdown allows an individual to choose their level of pension drawings with no limit, which is taxed at the individual’s marginal rate.
  • The maximum income limit for “Capped Drawdown” will be increased to 150% from 120% of the Government Actuaries Department (GAD) calculation of an equivalent annuity. This will provide the opportunity of a 25% increase in available gross income for those individuals entering into Income Drawdown.
  • The limit for Trivial Commutation (being able to draw your pension in its entirety as a lump sum from all of an individuals pension savings) will be increased from £18,000 to £30,000. This will allow individuals whose pension arrangements form a minor part of their retirement provision greater flexibility in drawing benefits.
  • The “Small Pot” commutation limit (allowing individuals to draw lump sums from small pension funds regardless of other pension provision) will also increase from 2 lump sums of £2,000 to 3 lump sums of up to £10,000.
 
From April 2015
 
  • Everyone in a defined contribution scheme will be able to access their entire pension from age 55.
  • The pension commencement lump sum will remain tax free and any income taken after this time can be taken without limit and taxed at the saver's marginal rate, as opposed to the punitive 55% rate.
  • The change will be fully retrospective so anyone in drawdown can benefit from the change.
  • No transfers will be allowed from public sector defined benefit schemes to defined contribution pension schemes. Private sector defined benefit schemes will be free to decide whether to adopt such controls.
  • Lump sum death benefits - The Government feels that the 55% tax rate on lump sum death benefits is too high. The consultation process for change will start now.
  
Pension Liberation
 
A number of promoters have recently established schemes which are intended to allow individuals to access pension benefits prior to age 55, which is currently prohibited under normal circumstances by pension tax rules.
 
The scheme encourages individuals to transfer pension funds to a newly registered or existing registered pension scheme prior to drawing benefits. Benefits are often paid in the form of a loan, thereby incurring significant tax penalties which, in many cases, eradicate most of the pension fund.
 
The March 2014 Budget has announced that legislation will be introduced in the Finance Bill 2014 to give HMRC powers to prevent such schemes being registered, and also to ease the process of de-registering.
 
This legislation is intended to:
 
  • Increase HMRC powers to detect and prevent liberation schemes and detect those already registered.
  • Prevent authorised surpluses being artificially created as a means of liberation.
  • Ensure that tax charges applied to schemes suspected of involvement in liberation are applied fairly.