Following the introduction of pension flexibility in April 2015, changes are being made to the pensions tax rules.
In a HM Revenue & Customs document published alongside the Budget (16 March) the changes are as follows:-
- Removing the requirement that a serious ill-health lump sum can only be paid from an arrangement that has never been accessed
- Replacing the 45% tax charge for serious ill-health lump sums paid where the member is over the age of 75 to tax at the member’s marginal rate of tax
- Allowing child dependants in drawdown to be able to access their fund after the age of 23
- Charity lump sum death benefit change tax treatment aligned and 2 year rule removed
- Trivial commutation lump sum can be paid out of a pension already in payment
- Cash Balance – scheme allowed to top up to remaining funds to meet the entitlement of member’s beneficiaries will be an authorised payment
What does this mean to you?
The law currently states that you can’t have a serious ill-health lump sum if you have taken any funds from that unvested arrangement. Previously you remove funds from your unvested funds without making them vested but the addition of UFPLS changed this.
For example, if someone has an unvested fund of £100,000 and takes £5,000 as an UFPLS then they would lose the right to a serious ill-health lump sum. In reality a separate arrangement could be set up and the rest of the funds transferred into that arrangement to avoid this but this change makes it easier.
The change in legislation will mean an equalisation with death benefits taxation.
As previously, a serious ill-health lump sum should only be considered if there is a need for cash as, by definition the member is going to die within 12 months, which means if there is an inheritance tax issue then money is being moved from an IHT friendly environment to the member’s estate.
As the law stands, a parent could die and leave 3 children, 2 over 23 and 1 under 23 who all move into drawdown. The over 23 year olds will be nominees (if they are named on the expression of wish or chosen by the scheme administrator). The under 23 year old will be a child dependent irrespective of the fact that they may not actually be dependent on their parent. If that child dependent turned 23 and had failed to withdraw the full amount of the drawdown fund in time (on which they may or may not have paid their marginal rates of tax depending on the age of the parent at death) then there are only two choices available; withdraw and pay an unauthorised payment charge or leave the fund and it can be passed on to that child dependent’s beneficiaries. However, the over 23s can access their drawdown as and when they want. This was not the intention of the legislation.
Essentially child dependents will become nominees at the age of 23 so it levels the playing field.
Charity lump sum death benefit
The legislation currently makes a difference between how a charity lump sum death benefit can be paid from drawdown and uncrystallised funds. It can only be a charity lump sum death benefit in relation to uncrystallised funds if the member is over 75 but the same age restriction does not apply to drawdown. This change addresses this.
The two year rule for payment of death benefits will not apply if it is paid to a charity.
Trivial commutation lump sum
With the addition of UFPLS the need for trivial commutation lump sums from money purchase schemes was seen as unnecessary. However, an unintended consequence of removing the reference to money purchase was that it meant annuities in payment couldn’t be paid out as a trivial commutation lump sum.
As always the devil is in the detail but this change should now legislatively allow this but practically it will be up to annuity providers.
It is also important to see the detail on this but the essence is that the cash balance scheme will be allowed to top up a member’s funds so that they can pay the promised amount to the beneficiaries without incurring an unauthorised payment charge.
To discuss these changes and how pension flexibility can work for you, if appropriate, please contact us at our office in Fareham.