New flexibility for individuals with DC pension savings

12 March 2015

Read about the impact on workplace pensions and savings from April 2015

Summary

  • Confirmation that ‘freedom and choice’ reforms for DC savers will be implemented from April 2015, “rewarding those who work hard and save with greater freedom and flexibility over what they choose to do with their pensions and savings”.
  • Confirmation that the reforms will include provision so that individuals can pass on their pension pot to the next generation, by allowing them to pass on their unused defined contribution pension savings to any nominated beneficiary when they die without having to first pay a 55% tax charge.
  • Further, from April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary.
  • In line with Government policy, the basic State Pension will be increased by the triple lock – the highest of average growth in earnings, inflation or 2.5%. The rise in April 2015 will be 2.5%, a cash increase of £2.85 per week for the full basic State Pension.
  • Further action will be taken to ensure the full costs of providing pensions for public service workers are met by employers.
  • Changes to the rules for individual savings accounts (ISAs).

Detail

55% tax charge on inherited pensions – From April 2015, beneficiaries of individuals who die under the age of 75 with remaining uncrystallised or drawdown defined contribution pension funds, or with a joint life or guaranteed term annuity, will be able to receive any future payments from such policies tax free where no payments have been made to the beneficiary before 6 April 2015. The tax rules will also be changed to allow joint life annuities to be paid to any beneficiary. Where the individual was over 75, the beneficiary will pay the marginal rate of Income Tax, or 45% if the funds are taken as a lump sum payment. Lump sum payments will be charged at the beneficiary’s marginal rate from 2016-17.

Changes to notional income rules – To assess means-tested benefits for those over the pension credit qualifying age, the Government will change the notional income rules applied to pension pots which have not been accessed, or have been accessed flexibly, from 150% to 100% of the income an equivalent annuity would offer, or the actual income taken if higher.

Pensions flexibility: £10,000 annual allowance – As announced on 21 July 2014, the Government will introduce a reduced annual allowance of £10,000 for money purchase pension contributions for individuals who have flexibly accessed a pension from 6 April 2015.

Pensions flexibility: transfers from funded defined benefit schemes – As announced on 21 July 2014, the Government will continue to allow transfers from funded defined benefit schemes to defined contribution schemes in the context of the new flexibilities.

Pensions flexibility: small pots rules – As announced on 21 July 2014, the Government will continue the small pots rules for withdrawals from defined contribution pension savings from 6 April 2015. These rules allow individuals to take up to three small pension pots from non occupational schemes, or an unlimited number from occupational schemes, of up to £10,000 as a lump sum without being subject to a reduced annual allowance of £10,000. The Government will also lower the age at which an individual can make use of these rules from 60 to 55 from 6 April 2015.

Uprating of pensions benefits – The Government confirms that the standard minimum income guarantee in Pension Credit will rise by the same amount as the cash increase in the basic State Pension. The Savings Credit threshold will rise by 5.1%. In consequence, the full new State Pension will rise to at least £151.25 a week; the actual amount will be set in autumn 2015.

Pensions tax relief: the age 75 rule – Following informal consultation since Budget 2014, the Government has decided not to make changes to the age limit at which tax relief can be claimed on pension contributions. This will remain at age 75.

Individual Savings Accounts (ISAs): transfer to spouses on death – The Government will legislate to allow an additional ISA allowance for spouses or civil partners when an ISA saver dies, equal to the value of that saver’s ISA holdings on their date of death.

ISAs: Qualifying Investments – The Government will consult on whether to allow crowdfunded debt-based securities into ISAs and on how this could be implemented.

ISAs: new annual subscription limits – The Government will uprate the ISA, Junior ISA and Child Trust Fund annual subscription limits in line with the Consumer Price Index (CPI). The 2015-16 ISA limit will be increased to £15,240. The Junior ISA and Child Trust Fund limits will both be increased to £4,080.

Comment

No surprises so far as workplace pensions and savings are concerned (although, the next Autumn Statement, following the General Election, could be a very different affair, regardless of the outcome).

Nevertheless, it is good to have confirmation that the freedom and choice reforms will go ahead as planned and on time in April 2015. This reinforces the comments we have made in previous client communications:

  • Early communication with members about the changes is recommended.
  • Members due to retire before next April may want to defer receipt of their benefits.
  • Trustees and employers with DC schemes will need to decide what options their scheme will offer. Whilst we do not envisage many schemes offering income drawdown, unless there is already a drawdown facility, we expect that there will be a substantial demand for Uncrystallised Fund Pension Lump Sums (UFPLS). If scheme are willing to offer this option, they will need to consider, in conjunction with their administrators, the appropriate parameters (e.g. how many lump sums will members be able to take and at what frequency). Also rules will need updated, although there will be overrides in the legislation that can be relied on pending any revisions to scheme rules.
  • Retirement option forms will need to be revised.
  • There could be an increase in the number of DB members interested in transfers to DC schemes. DB schemes that have not already done so may want to commission an ‘insufficiency report’ so that transfer values can be reduced to reflect underfunding; trustees should also consider the policy on transfers-out for members that do not have a statutory right to a transfer (e.g. because they are very close to normal retirement age).
  • Finally, the DC flexibilities apply to DC ‘savings’ including those in DB schemes (e.g. additional voluntary contributions). So, the comments made in relation to DC schemes also directly affect the DC elements of DB schemes.