We examine changes to pensions from April 2015 through to April 2016.
From 6 April 2015 People with defined contribution schemes who are at least 55 years old can make withdrawals up to the value of the funds invested in the scheme. The first 25% will be tax free and the person can choose whether to have the 25% tax free element applied to each withdrawal or to allocate it to one withdrawal. The remainder should then be moved within six months into one or more funds that allow income to be withdrawn (e.g. monthly, quarterly, yearly or irregular withdrawals).
If the rest of the funds are not moved within six months, tax will be due on the lump sum (normally at the rate of 55%). Income taken after the tax free-lump sum will be taxable at the individual’s marginal rate.
If income withdrawals are made from a pension scheme after 6 April 2015 then that individual will be restricted to making future pension contributions of no more than £10,000. However, after buying an annuity you can in most cases continue to get tax relief on pension savings of up to the annual allowance of £40,000 (2015-16); if you buy a flexible annuity the maximum future pension contributions you can make which qualify for tax relief is reduced to £10,000.
Funds left in a defined contribution pension scheme when the individual dies would from 6 April 2015 usually pass to the heirs tax free. If death occurs before age 75, the heirs can make withdrawals as and when they choose free of tax, provided they take it within two years. If they take it after two years it will be subject to tax at the beneficiary’s marginal rate. If death occurs after age 75, withdrawals will be treated as taxable income of the heirs and will be taxed at their marginal rates or if all the funds are withdrawn as a single lump sum between 6 April 2015 and 5 April 2016 this would be taxed at 45%.
From 6 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 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 (Finance Bill 2015).
Practitioners, unless authorised by FCA directly, should refer clients to an IFA and/or the free guidance that is available. Free guidance on the options available has been promised by the government’s new Pension Wise service. This can be via face to face meetings hosted at Citizens Advice Bureaux and guidance over the telephone provided by The Pensions Advisory Service.
From 6 April 2016 Pensioners who have previously purchased an annuity using their pension funds will be able to sell that annuity and receive the cash. This will then be taxed at the individual’s marginal rate.
The government will legislate from April 2016 to allow people who are already receiving income from an annuity to agree with their annuity provider to assign their annuity income to a third party in exchange for a lump sum or an alternative retirement product.
The government will reduce the lifetime allowance for pension contributions from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1m will be introduced alongside this reduction to ensure the change is not retrospective. The lifetime allowance will be indexed annually in line with CPI from 6 April 2018.
Guidance from the Money Advice Service The Money Advice Service working in consultation with Pension Wise has published guidance to help people with a defined contribution pension scheme decide what to do with that pension pot(s).