UK Pensions – Budget Announcement April 2014
The UK Budget this week delivered unexpected and immediate changes to UK pensions as well as the publication of a consultation document.
Whist we will need to wait for details of the actual legislation, we would like to give you a brief summary of the main changes announced.
1. Flexible Drawdown
With effect from April 2015, anyone will be able to take advantage of flexible drawdown, without the need to have (as is currently the case) a minimum guaranteed pension of £20,000 per annum. From 27th March the minimum pension required for flexible drawdown is reduced to £12,000
Currently there is a tax charge of 55%. This will be reduced to the individual’s marginal rate of tax. While this could be as low as 20%, with a 40% tax rate at just under £32,000 and 50% at £150,000, there will still be a high tax charge to pay. It should also be borne in mind that if the pension fund is taken, and not spent, any amount left over on death will fall into the client’s estate for IHT purposes and potentially taxed at a further 40% (or the prevailing IHT rate at the time).
2. Charge on death.
This is currently 55%, and is viewed as potentially too high. HMRC intend to consult with stakeholders on this, but with income tax at the marginal rate and IHT at 40%, it would seem unlikely that this rate will fall substantially.
3. GAD rates will be increased from 120% to 150% from 27th March.
The Gad rate is the amount the government decide you can take from your UK pension. Previously you could take 120% of what percentage they agreed, that has now risen to 150%.
That is, where the whole amount that can be taken as a lump sum i.e. small pensions. This amount has been increased to £10,000 per pension pot, and the total can include up to three pensions of £10,000 giving a combined maximum triviality payment of £30,000.
5. Transfers from public sector schemes
Due to the above changes, the UK Government’s view is that this will have an effect on the number of people looking to move from final salary schemes to defined contribution schemes. As public sector schemes are underfunded, their view, taken from the briefing note, is as follows:
“ However, the government recognises that greater flexibility could lead to more people seeking to transfer from defined benefit to defined contribution schemes. For public service defined benefit schemes, this could represent a significant cost to the taxpayer, as these schemes are largely unfunded.
Consequently, “government intends to introduce legislation to remove the option to transfer for those in public sector schemes, except in very limited circumstances. “
This means that they will be seeking to disallow transfers from UK public sector schemes.
6. Government are also consulting with industry on whether to introduce restrictions on transfers from other final salary schemes.
A copy of this consultation document can be found here www.gov.uk/government/uploads/system/uploads/attachment_data/file/293079/freedom_and_choice_in_pensions_web.pdf
While the main focus of reporting seems to be around the ability to take the pension fund as cash, in reality this has always been the case via flexible drawdown, so the only change being considered in this consultation is the removal of the requirement to have a guaranteed income.
With income tax being paid at marginal rate, this would potentially increase the tax actually paid on the pension fund eg. A fund of £200,000 for a 60 year old could provide an income of around £12,000 at current GAD rates. This would (using UK tax rates) have a tax bill of £400 (20% on £2,000) and a net income of £11,600. Taking the amount as a lump sum would mean a tax bill of £73,623 and a net payment of £126,377, or just under 11 years’ worth of net income that could have been taken from the pension. Plus, if the amount was invested, tax would also be due on any income or gains produced. As well as the amount being within the client’s estate for IHT if UK domicile – whereas in a pension (QROPS or UK scheme) the fund will grow free of tax and will be outside the estate for IHT.
No doubt there will be more focus on the above over the next few days, but if you would like to discuss any of the above in more detail, please don’t hesitate to contact me.
(Source Momentum Pensions April 2014)