Finance Bill 2015

UK pensions changesIn the 2014 Budget the Government announced changes to the rules on taking benefitsfrom defined contribution pension schemes.

This alert is intended to give a brief overview of the tax changes applicable from6 April 2015, which will affect the choices that individuals can make in connection withtheir retirement. Further changes, announced to apply from 6 April 2016, will also affectthose currently accumulating pension funds and those who have already retired andpurchased annuities.

In addition to the tax implications, there will also be investment considerations andindividuals should ensure that they seek financial advice from an FCA regulated advisor.

Transitional changes took effect on 27 March 2014 while the Taxation of Pensions Act2014 received Royal Assent on 17 December 2014, with most of the changes coming intoeffect from 6 April 2015.

New options for accessing defined contribution benefitsFor most individuals the only options currently available to access their definedcontribution pension funds are to purchase an annuity or to enter into capped drawdown.

From 6 April 2015 it will be possible for all individuals aged 55 or over to draw from theirdefined contribution pension fund whenever and however they wish.

In order to allow flexible access to defined contribution pension funds, the Governmenthas introduced three new pension concepts:

� The flexi-access drawdown fund

� The uncrystallised funds pension lump sum (UFPLS)

� Flexible annuities

Individuals will continue to have the option of using their fund to purchase a lifetimeannuity should they wish to do so and it will also remain possible to take up to 25% of apension fund as a tax free lump sum. The lifetime allowance test will continue to applyeach time part of a pension fund is crystallised and this will now include each of the newflexible access options.

The options available in respect of any particular pension scheme will continue to besubject to that scheme’s specific rules. It may therefore be necessary to transfer funds toan alternative scheme to access the new flexibilities. It also may be possible to transferfunds from a defined benefit scheme into a defined contribution scheme. Tax andinvestment advice should always be taken in these circumstances.

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Flexi-access drawdown fundFrom 6 April 2015 any individual aged 55 and overmay designate all or part of their defined contributionpension funds as available for drawdown, withoutany restriction. This will be known as a flexi-accessdrawdown fund. Individuals will be able to receive atax-free lump sum of up to 25% of the value of thetotal funds used (i.e. the total drawdown funds plusthe lump sum).

The funds within the flexi-access drawdown fundmay then be taken out in any amount and at anytime. All income withdrawals from the flexi-accessfund will be taxed at the individual’s marginal rate ofincome tax.

Any pension fund currently in flexible drawdown willconvert to a flexi-access drawdown fund on6 April 2015.

Any pension funds currently in capped drawdown willcontinue as ‘drawdown pension funds’. The fund willbe converted to a flexi-access drawdown fund if thecapped drawdown limit is exceeded or the individualnotifies the pension scheme that they would like toconvert to a flexi-access drawdown fund. There maybe advantages of remaining in the grandfatheredcapped drawdown regime and this should bediscussed with your advisor if relevant.

Uncrystallised Funds PensionLump SumsFrom 6 April 2015 it will be possible to withdrawfunds directly from a defined contribution pensionscheme without first having to designate funds fordrawdown or to purchase an annuity. This will bedone by way of an UFPLS. This will be a lump sumpayment of any amount taken directly from theuncrystallised pension funds. Up to 25% of eachlump sum will usually be paid tax free with theremaining 75% taxed at the individual’s marginal rateof income tax.

The entire pension fund can be taken in this manner,or alternatively, a series of smaller UFPLS paymentscan be taken as and when required.

Flexible annuitiesA further category of annuity will be available forpurchase after 6 April 2015.

The new type of flexible annuity will include thefollowing features:

� The ability for the annuity to decrease over time

� The removal of the 10 year maximum guaranteeperiod for guaranteed annuities

Annuity income will continue to be taxed at anindividual’s marginal rate of income tax.

Limit on contributions if pensionhas been accessed flexiblyTo prevent excessive recycling of pensionwithdrawals, there will be a reduced annualallowance for pension contributions applicable forany individual who has accessed their pension fundsflexibly after 6 April 2015.

The reduced annual allowance will be £10,000 andwill apply to defined contribution pension savingsonly. The overall maximum annual allowance acrossall pension arrangements including defined benefitschemes will remain at £40,000. These limits may besufficient for some to consider taking their pensionbenefits flexibly while continuing to contribute belowthese levels.

The reduced annual allowance will apply if any of thefollowing events occur:

� A cash amount is taken over the tax-free lumpsum from a flexi-access drawdown account.

� An UFPLS is taken.

� A flexible annuity is purchased.

� A scheme pension is taken from a definedcontribution scheme with fewer than 12pensioner members.

� A stand-alone lump sum is taken (related to preA Day protected benefits) where the individualhas primary but not enhanced protection.

Changes to taxation of pensionson deathCurrently, pension funds in drawdown are subject toa 55% tax charge upon death. Any uncrystalliseddefined contribution pension funds held on death ifthe pensioner is over the age of 75 will also besubject to a 55% tax charge.

With effect from 6 April 2015, the death tax ondefined contribution pensions will be reformed sothat the following will apply:

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Age atdeath

Uncrystallisedfunds

Crystallised fundsand jointlife/guaranteedannuities

Aged under75

Tax free up tolifetime allowance

Tax free

Aged 75 orover

Marginal rate forincomedrawdown or45% for lumpsum

Marginal rate forincomedrawdown or45% for lumpsum

It is proposed that the 45% lump sum taxation ratefor funds passed on after age 75 will be removedand replaced by taxation at the beneficiary’smarginal rate of income tax with effect from6 April 2016.

The above rules allow pension funds to be passedon from generation to generation. Tax will only bepaid in the event that funds are actually withdrawnfrom the pension wrapper and in cases where fundsare passed down on a death which occurred beforethe age of 75, funds can generally be paid whollytax-free.

The position if the lifetime allowance will beexceeded is more complex and specialist advice isrecommended in these circumstances beforewithdrawals are made.

This means that in some cases, passing on a right toa pension can be an effective way of passing wealthon to the next, or even subsequent, generation, andshould be considered as part of long term estate andinheritance tax planning.

Future changes proposed from6 April 2016In Budget 2015 the Chancellor announced furtherchanges to the taxation of pensions, to take effectfrom 6 April 2016.

The lifetime allowance for pension savings willreduce from £1.25mn to £1mn.

We understand there will be new fixed and individualprotection regimes introduced to protect individualswith existing pension savings already in excess of£1mn. Taxpayers may also consider IndividualProtection 2014, which can be claimed up to5 April 2017.

The lifetime allowance will be indexed with effectfrom 6 April 2018 and will increase annuallythereafter in line with the Consumer Prices Index.The annual allowance will remain unchanged (at£40,000.

Legislation will be introduced with effect fromApril 2016 to allow individuals with purchasedannuities to assign their annuity income to a thirdparty. A consultation has opened to consider how theproposed secondary annuities market may work inpractice.

The current proposals would enable an annuitant toeither take the proceeds immediately, subject to taxat their marginal income tax rate, or to put theproceeds back into a pension wrapper with taxincurred only when they are drawn down.

How EY can helpThose individuals that have not yet crystallised theirdefined contribution pension funds should considertaking advice in relation to the tax implications of theoptions that will be available to them. We are able toprovide assistance in several areas, for both UK andoverseas pensions including:

.

� Tax year end pension income planning to makeuse of basic and higher rate income tax bandsfor pension withdrawals and any unusedpension reliefs.

� Tax efficient retirement income planning andmodelling of expected tax liabilities under thenew pension regime, including the use of othersavings and investments to meet income needsduring retirement.

� Identification and calculation of potentialpension tax charges including the lifetimeallowance and the annual allowance charge.

� Inheritance tax and succession planning inconnection with pensions.

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Further information

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