The great pension revolution has been put on hold, but for how long?
Direct pension changes were limited to tidying up a few areas where the legislation failed to work as intended. These current rules and changes are:
Serious ill-health lump sums can be paid only out of funds that have not been accessed. If a serious ill-health lump sum is paid to an individual who has reached age 75, it is taxed at 45%. Dependant’s drawdown pension and flexi-access drawdown pension may be paid following the death of a member to the member’s child who has not reached age 23.
Where the member has no dependants a charity lump sum death benefit may be paid out of their drawdown or flexi-access drawdown pension funds irrespective of their age at death.
Trivial commutation lump sums can be paid out of defined benefits funds whether or not the funds have been accessed.
An uncrystallised funds lump sum death benefit must be paid out of money purchase funds valued at the member’s death. Cash balance benefits are money purchase benefits that are not calculated on the basis of contributions to the scheme. They may be paid as an uncrystallised funds lump sum death benefit but the payment according to the scheme rules will be the amount promised to fund the benefits of the beneficiary.
Proposed revisions announced Legislation will be introduced in Finance Bill 2016 to amend Finance Act 2004 for the following areas:
Serious ill-health lump sums – if an individual would meet the requirements to take a serious ill-health lump sum but for the fact that they have accessed their pension, they will be able to take the remaining funds that have not been accessed as a serious ill-health lump sum. Where a serious ill-health lump sum is paid to an individual who has reached age 75, it will be taxable at that individual’s marginal rate rather than at a flat rate 45%.
Dependant’s drawdown and flexi-access drawdown – where an individual has a dependant’s drawdown pension fund or dependant’s flexi-access drawdown fund because they are a child under the age of 23 of the member who has died, they will be able to continue to receive drawdown pension or flexi-access drawdown pension as authorised payments after reaching age 23. This would ensure that a child dependant who continues to draw down from their fund when they have reached age 23 does not have tax charges of up to 70% on any payments received from that date, and aligns their tax treatment with that of a nominee of the member.
Charity lump sum death benefit – a change is made to align the tax treatment of a charity lump sum death benefit after a member has died under the age of 75 whether paid out of drawdown pension funds and flexi-access drawdown funds or out of funds that have not been accessed (uncrystallised funds). The need to pay an uncrystallised funds lump sum death benefit a drawdown pension fund lump sum death benefit or a flexi-access drawdown fund lump sum death benefit within two years when it is paid to a charity is also removed.
Trivial commutation lump sum – a change is made so that a trivial commutation lump sum may be paid out of a money purchase scheme pension that is already in payment.
Cash balance – where a member dies and the scheme must top-up the remaining funds to meet the entitlement of the member’s beneficiaries to an uncrystallised funds lump sum death benefit under the scheme rules, the full amount of the lump sum death benefit will be an authorised payment.