The Taxation of Pensions Act contains the radical pension freedoms announced by Chancellor George Orborne at Budget 2014 along with the more generous tax benefits alluded to in his speech at the Conservative Party Conference in September. These pension freedoms come into force on 6 April 2015.
In advance of a more detailed technical briefing, here are five key features of the new legislation. Remember, that particular pension arrangements may restrict what benefit options they allow.
- The pension freedoms will allow people of pension age three new ways of accessing their pension savings: via flexi-access drawdown, as a taxed lump sum, or income from a flexible annuity. To counter worries of these freedoms being used as a mechanism for receiving more tax efficient salary, anyone making use of these new pension freedoms will see their annual pension contribution allowance reduced to £10,000.
- Flexi-access drawdown is the new default version of drawdown, replacing capped drawdown. It allows people to draw a tax-free cash sum and then draw the rest less marginal rate of income tax as and when they decide. Those in the current form of capped drawdown can switch to flexi-access drawdown, but their contribution allowance will reduce.
- The new rules also allow most people of pension age to access their pension savings without needing to set up a drawdown account. This withdrawal facility is known in legislation as an Uncrystallised Funds Pension Lump Sum and allows one quarter to be drawn tax-free and the remaining three quarters taxed at marginal rate of income tax. This method should enable schemes not wanting to administer drawdown funds to offer some pension freedoms to their members.
- Pension flexiblity has also come to annuities. The tax legislation previously required annuities to be payable for life, provide a level of increasing stream of income and if there was a minimum payment term, it could not be longer than ten years. The new rules allow income to go up or down, and there is no limit on the minimum payment term.
- The most incredible part of the new legislation surely is the change in tax treatment of death benefits. It will now usually be possible to pass on your pension savings to your loved ones without any deduction of tax if you die before reaching age 75, whether you have accessed your lump sum on retirement or not. There is still a cliff edge at age 75 though, as death after that age means that tax of up to 45% will apply (income tax from 2016/17 we are told).
- The Taxation of Pensions Act 2014 is now law, with pension freedoms taking effect from 6 April2015.
- Some new concepts are introduced, with the usual level of detail expected of pension legislation, which will be summarised in a latter technical briefing.
- For now, be aware of the three new ways of drawing pension income, the reduced contribution allowance for those making use of the new pension freedoms, and the more generous tax treatment of death benefits.