After
the end of the budget
consultation on 11th June, the Treasury issued its response
on the 21st July on pension shake-up, explaining pension changes, which offer a
greater deal of freedom for both pension holders and providers. These pension
changes are generally all positive and the biggest for more than 100 years.
Some of the changes are discussed here.
In
order to ensure that all defined contribution schemes are able to offer greater
flexibility to their members a permissive statutory override shall be
introduced. The benefit of permissive statutory override is that it allows
schemes to ignore their scheme rules and follow the tax rules instead; in order
to make payments flexibly or to provide a drawdown facility.
According
to the government mandating these schemes provide flexible payments, which
would be disproportionate. Even though some schemes would like to offer
flexibility to their members but due to the legal and administrative costs
involved, they would prefer not to amend their schemes. The government under
these situations would prefer that the schemes were in a position to provide
flexibility without amending their rules.
On
the other hand, if the schemes do not offer flexible access, the individuals
would be able to transfer between defined contribution schemes up to the point
of retirement.
It
is also expected that the government would make various changes to the tax
laws, in order to allow more freedom to providers to create new and innovative
products, which meet the needs of the consumers more closely. These include;
allowing lump sums to be taken from lifetime annuities, allowing payments from
guaranteed annuities to beneficiaries as a lump sum, where they are under
£30,000, removing the 10-year guarantee period for guaranteed annuities and
decreasing lifetime annuities.
The
real intention behind the new tax rules is to provide people with a greater
access to their retirement savings. However, they also ensure that individuals
do not use these new flexibilities to avoid tax on their current earnings by
diverting their salary into their pension with tax relief and then immediately
withdrawing 25 percent tax-free.
Those
who choose to draw down more than their tax-free lump sum from a defined
contribution pension will be able to benefit from further tax-relieved pension
saving, and make further tax-free contributions to a defined contribution pension
of up to £10,000 a year.
Under
the current rules, those who are currently in ‘flexible drawdown’ are not able
to make further pension contributions, having an annual allowance of £0.
However, from April 2015 they will be subject to a new annual allowance limit
of £10,000. This would allow individuals accessing a defined contribution
pension worth more than £10,000 to contribute up to £10,000 a year with tax
relief to a defined contribution pension, after their first flexible
withdrawal.
Without
being subject to a £10,000 annual allowance on subsequent contribution,
individuals can make withdrawals from three small pension pots and unlimited small
occupational pots worth less than £10,000.
Other
proposed changes under the new tax rules include the increasing of minimum age
at which people can access their private pension from 55 to 57 in 2028 for all
pension schemes. However, this change will not be applicable to those in the
public sector; which includes police, armed services and firefighters.
According
to the government, when the new system is established in 2015; the 55 percent
tax charge on pension savings in a drawdown account at death will be too high.
As a result, in this year’s autumn statement; the government has intentions to
announce the changes.
The
government will introduce two new safeguards to protect individuals and pension
schemes, but will continue allowing transfers from private sector defined
benefit to defined contribution schemes, apart from pensions that are already
in payment.
Prior
to accepting a transfer; an individual would be required to take advice from a
professional advisor, authorized by FCA and independent from the defined
benefit scheme.
Currently,
if the interests of the members of the pension fund trustee or the scheme are
prejudiced by making the payments within the usual period, than they can ask
the regulators for a longer time to make transfer payments. However, now there
will be new rules for delaying the transfer payments for trustees and the
scheme funding levels when deciding on transfer levels will also be taken in to
consideration.
For
those defined members who wish to access their savings flexible, the government
has intentions to consult on removing the requirement to transfer first to
defined contribution schemes.
Since,
there is no money involved in transfers from unfunded public service defined
benefit schemes; therefore, the government intends to consult on removing it.
However, transfers from funded defined benefit to defined contribution schemes
will be allowed, and safeguards similar to those in the private sector will be
introduced where appropriate.
Under
the trivial communication and small-pot rules, individuals are allowed to take
up to £30,000 of total pension savings as a lump sum, or a £10,000 small pot as
a lump sum regardless of total pension wealth. The age at which an individual
can make use of these rules will also be lowered from 60 to 55.
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