Pension Reform 2015The Taxation of Pensions Act 2014

(in a Nutshell!)

Elissa Da Costa-WaldmanBarrister

Budget 2014

Following the 2014 Budget, the Taxation of Pensions Act 2014 makes radical changes to the treatment of pensions.

Currently-• pensions savings cannot be accessed prior to age 55• The remaining pension (the income stream) cannot be accessed

as capital From April 2015 – ALL CHANGE!!!!!!!!!!!!!!

From 6th April 2015 over 55’s may-

• Access as much as they want from their pension pots(dubbed ‘the Lamborghini option’)

• When they wantfrom a money purchase arrangement

Where this choice is exercised, any future savings in money purchase schemes will be subject to a £10,000 money purchase

annual allowance

Changes made by the Act• Allowance of all funds in a money purchase scheme to be taken as

an authorised taxed lump sum (removing the higher unauthorised payment tax charges

• Increase flexibility of the income drawdown rules by removing the maximum cap on withdrawal and minimum income requirements for all new drawdown funds from 6th April 2015

• Enable those with capped drawdown to convert to a new drawdown fund with their scheme if they wish

• Enable pension schemes to make payments directly from pension savings with 25% taken tax free (instead of a tax free lump sum)

• Introduce a limited right for scheme trustees and managers to override their scheme’s rules to pay flexible pensions from money purchase pension savings

• Remove some restrictions on lifetime annuity payments• Ensure that the new system is not exploited by some individuals

to gain unintended tax advantages by introducing a reduced annual allowance for money purchase savings where the individual has flexibly accessed their pension savings

• Increase the maximum value and scope of trivial commutation lump sum death benefits

• Provide new information requirements to ensure that individuals who have flexibly accessed their pension savings are aware of the tax consequences of doing so

• Restrict or reduce certain tax charges that apply to death benefits

• Enable people other than dependents to inherit unused drawdown funds and provide that , where the death occurred before 75, lump sum death benefits and drawdown pension from these funds can be paid tax free, subject to the member having sufficient available lifetime allowance; and

Finally-

• Make changes to the rules for individuals who receive UK tax relied in respect of pension savings in non- UK pension schemes so that the new flexibilities and restrictions will apply equally to them

Overview of the Structure of the Act• Four sections and two Schedules• Section 1 introduces Schedule 1• Section 2 restricts and reduces the tax charges that

apply to certain lump sums paid in respect of the member

• Section 3 introduces Schedule 2• Section 4 contains definitions that apply to the Act and

a power to amend specified legislation in consequence of the Act

Schedule 1Provides the detail of the changes to existing legislation to provide

the new flexibility – Schedule divided into 7 parts

Part 1 Amends Finance Act 2004 to distinguish between pre 06.04.15 drawdown pension and post 06.04.15 ‘flexi-access’ drawdown fundPart 2 – makes amendments such that conditions are removed in respect of annuities that would have applied if individual entitled to annuity before 06.04.15

Schedule 1Part 3 – permits payment of new authorised lump sum – UFPLS

Uncrystallised Funds Pension Lump Sum• No limit on the amount that can be paid as an UFPLS to certain

individuals over 55 subject to then having available lifetime allowance

• Liability to income tax at the individual’s marginal rate on 75% of UFPLS – 25% paid tax free (same result as previously)

• Payment of UFPLS triggers money purchase annual allowance rules in respect of individual

Schedule 1Part 4 – The Money Purchase Annual Allowance Rules• Where a person has opted to ‘flexibly access their pensions

savings’, a £10,000 annual allowance immediately applies to their future money purchase pension savings

• Such persons will retain an annual allowance for ‘defined benefits pension savings of at least £30,000, dependant upon value of the new money purchase pension savings

• Unused allowance brought forward from earlier tax years will not be available to increase the £10,000 annual allowance

Schedule 1

Part 5 – makes miscellaneous amendments to various primary and secondary legislation

Part 6 – amends the Registered Pension Schemes (Provision of Information) Regulations 2006 to provide for the passing on of information to scheme administrators and members

Part 7 – amendments in respect of non UK pensions

Schedule 2Makes changes in respect of death benefits and is divided into 4 parts

Part 1 - extends categories of person who can have a drawdown fund following the death of a member (currently only dependants – after 06.04.15 can be nominated persons and successors to designate funds into flexi-access drawdown funds). Provides that unused drawdown funds on death of any beneficiary can be passed on to another successor

Part 2 – makes amendments in connection with lump sum death benefits that are subject to the special lump sums death benefit charge

Schedule 2Makes changes in respect of death benefits and is divided into 4 parts

Part 3 – introduces new test against the lifetime allowance for funds that were uncrystallised at the time of the member’s death

Part 4 – ensures that payments of income withdrawal from a dependant’s, nominee’s or successor’s drawdown fund are not subject to income tax where the preceding member, dependent, nominee or success, died before age 75 and the designation of the funds into drawdown for the beneficiary was made within a two year period.

What does it all mean for individuals?

• Danger• Risk

• No pension on retirement!!!!

• Reforms encourage people to take out all their pension savings to enjoy their life now

• Need understanding of the tax implications

• Need understanding of annual allowances and capping

• Need understanding of what will be left, if anything, in retirement

Score Exchequer 4 The People 0

What does it all mean for the Family Lawyer?

• Make sure we understand what is possible• Could be advantageous with otherwise small

matrimonial pot but large pension assets• Gives choices not previously available to over 55s• Younger ex-spouses could take cash now and save more

later and for longer

What should lawyers tell their Clients?

• That we give legal advice not financial advice;• That we can make some creative suggestions; BUT• The Client needs to see an accountant/tax expert/IFA to

assess the best and most tax/cost beneficial options

There will be serious tax implications for everyone and the lower the earner the greater will be the effect of removing pension funds

to spend now

What else should lawyers tell their Clients?

• Not to take all their pension funds out without seeking such advice

• Get any advice in writing (although if already issued, the Court will order the expert advice and there will be a joint letter of instruction and finally the written report)

What should lawyers expect/do when making Financial Remedy Applications?

• A more creative judicial approach to pensions• Include pensions in the matrimonial pot now whereas this was

deprecated previously – pensions just like any savings account now

• Consider the need for expert pension advice AND tax advice at the first directions appointment in order to make creative proposals prior to and at FDR

What should lawyers expect/do when making Financial Remedy Applications?

Most Important Aspect with Large Pension Pots

• Consider whether section 37 application necessary; or• Undertaking in similar words

• NOT TO DISSIPATE OR OTHERWISE WITHDRAW PENSION FUNDS UNTIL RESOLUTION OF MATRIMONIAL FINANCE

DISPUTE