Following the new revisions, Pensions will become more and more important in estate planning as well as retirement planning. Here is a summary of the main points, some of which were not so clear when the new flexible rules first hit the news:
- Capped drawdown retains the £40,000 annual allowance
Anyone already in capped drawdown before 6 April 2015 can continue to make contributions up to the £40,000 annual allowance. Provided full flexibility isn’t required at outset, an account holder can access capped drawdown whilst continuing to make significant contributions.
Accessing the new flexibility, or designating new funds for drawdown through a separate arrangement will cause the annual allowance to be cut to £10,000 (but designating new funds for drawdown within an existing capped drawdown plan which is a single arrangement, will not disturb the £40,000 limit.)
*Tactical Planning point. Capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. Investors wishing to carry on a drawdown arrangement yet take advantage of the £40,000 limit would need to enter into a drawdown arrangement (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that level of annual contribution allowance.
2) Capped drawdown to capped drawdown transfers
Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 annual allowance. If they wish to access the new flexibility following transfer they can notify the receiving scheme that the funds are to be deemed ‘newly designated’, i.e. be classed as flexi-access, which would then see their annual allowance cut to £10,000.
3) 55% tax charge on death
The Bill carries through on the promise to scrap the 55% tax charge on lump sum withdrawals following death in drawdown post 75 and on crystallised funds. The tax charge has been cut to 45% and now only applies to lump sum payments where death occurs after the age of 75. The charge will also be levied on value protected annuities and pension protection lump sums from DB schemes.
4) Anti-Tax free cash recycling
Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This is now been cut further to £7,500.
5) Triviality and small pots
Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum is being reduced from 60 to 55 (or earlier if under ill-health rules).
6) Temporary non-residence rules
Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax. For example, currently someone in flexible drawdown drawing the benefits while non-UK resident and then returning to the UK may be subject to UK income tax if they return to the UK within 5 tax years.
The Bill expands the rules to include the new flexible income options and now also includes ‘flexible annuity’ and ‘money purchase scheme pensions’. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.