PensionsSep 10 2014

Goodbye to all that...

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The legislative changes designed to introduce “Freedom and Choice in Pensions” will take effect on 6th April 2015. The changes are on the whole very positive and are likely to encourage people to save more and give more consideration to how they spend their accumulated funds.

There are however some opportunities under existing legislation which will be lost unless action is taken NOW. This article aims to highlight these planning opportunities and the clients they might be suitable for.

Trivial commutation and small pots

The current rule: Individuals who have reached age 60 and who have total pension savings of less than £30,000 may take their benefits as a single lump sum, of which 25% is paid tax-free. It is also possible to commute up to 3 individual pension plans which are each worth less than £10,000, creating a potential lump sum withdrawal of nearly £60,000.

From 6th April 2015: Savers will instead be able to withdraw unlimited lump sums under the new rules the triviality rules will be removed for defined contribution (DC) pensions. The lump sum may be accessed using an Uncrystallised Fund Pension Lump sum (UFPLS). The tax treatment of each UFPLS will be the same as a trivial commutation or small pots lump sum – 25% paid tax-free and 75% added to taxable income.

This facility will be available from age 55 and for most people will be more accessible than triviality however the UFPLS comes with a condition – tax relief on future pension contributions will be limited to the Money Purchase Annual Allowance (MPAA) of £10,000.

The planning opportunity: Clients who have reached age 60 with the relevant level of savings could withdraw up to £60,000 before April and retain an Annual Allowance of £40,000.

Conditions: Clients must reach age 60 prior to 6th April and have separate individual pension plans of less than £10,000 each. These plans should be taken under the “small pots” rules, after which total pension savings must be less than £30,000.

It gets better: Clients of the relevant age who currently have less than the maximum savings amounts outlined above, and who have relevant earnings, could make a single premium contribution and receive tax relief on the full amount before commuting their pension savings. As 25% of the commuted amount is paid tax-free they will see an immediate gain on their investment.

Suitable for: This may suit clients who require a lump sum immediately but who intend to save more for actual retirement at a later date. It may also suit spouses employed in the family business, particularly if they have a lump sum to invest.

Capped drawdown

The current rule: Individuals withdrawing benefits via a capped drawdown plan may take flexible income of between £nil and 150% of the applicable GAD maximum level.

From 6th April 2015: Individuals entering into a new drawdown contract will join a Flexi-access drawdown plan (FAD). There are no limits on the amount of the fund that may be taken as income, however entering FAD and taking income will trigger the MPAA of £10,000.

Individuals with an existing capped drawdown arrangement will not be subject to the MPAA if they continue to limit their income withdrawals to within the GAD maximum amount.

The planning opportunity: Clients who have reached age 55 can protect their Annual Allowance of £40,000 by consolidating their savings into one plan and entering capped drawdown before 6th April

Conditions: Clients be aged 55 prior to 6th April in order to be eligible to enter capped drawdown. Once in drawdown any income taken must be within the applicable GAD limits. If this level is exceeded the client will automatically enter FAD and trigger the MPAA.

It gets better: Clients with existing capped drawdown plans will be able to designate further amounts for drawdown without triggering the MPAA providing total income withdrawn remains with GAD limits. This means clients can protect their Annual Allowance by crystallising a relatively small amount.

Suitable for: This may particularly suit “silver entrepreneurs” looking to set up a new business while retaining the ability to use profits tax efficiently to fund their retirement.

Block transfers

The current rule: Individuals who qualify for higher tax-free lump sums (PCLS) under pre-A Day rules which ended on 6th April 2006 can protect their benefits and retain this right, however the protection is usually lost on transfer to a new pension arrangement.

Primarily in order to protect members of employer-sponsored arrangements where individual members have limited control over the structure and management of the scheme, the legislation allows the right to an enhanced PCLS to

be retained if two or more members transfer their benefits at the same time – a so-called “buddy” or “block” transfer.

Trustees of existing schemes may choose to offer the retirement options available after 6th April but are not obliged to do so. It is unlikely that older schemes will make the changes necessary to offer the new options.

Up to 6th April 2015: a temporary relaxation in the rules will allow members of pre-A Day pension arrangements to retain their enhanced PCLS following transfer without the need for a “buddy” to transfer at the same time.

The planning opportunity: Clients with pre-A Day plans can transfer to a modern pension arrangement which allows them to access the new retirement options even if their current contract does not allow it.

Conditions: Clients must transfer all of their benefits under the existing arrangement in one transaction prior to 6th April and must take all of the benefits within the receiving scheme before 6th October 2015.

It gets better: As an alternative to the above clients with pre-A Day plans could choose to take their PCLS from their existing pension and transfer the part of the fund designated to provide income from another arrangement. This is subject to the same timescales as above.

Suitable for: This would particularly suit clients who are members of pre A-Day single-member pension schemes, such as section 32 buyout plans, and one-man Executive Pensions Plans or Small Self-Administered Schemes, and who will have reached their 55th birthday before 6th October.

Scottish Life is ideally placed to help you with these and other pension planning opportunities. We are a pension specialist company with over 70% of the external linked and freestanding drawdown market*, you can be sure of our ability to help you handle income drawdown with confidence.

For more information on our drawdown product please visit www.scottishlife.co.uk/headon or call 0845 60 40 800.

In two weeks time, we will look at planning opportunities arising after the new rules come in on 6th April 2015.

Fiona Tait is business development managet at Scottish Life

For professional advisers only

* 2014 Royal London and Association of British Insurers figures

The tax situation will depend on personal circumstances and could change in the future.

Scottish Life is a division of the Royal London Group which consists of The Royal London Mutual Insurance Society Limited and its subsidiaries.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions and is a member of the Association of British Insurers and the Association of Financial Mutuals. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Corporate Pension Services Limited is authorised and regulated by the Financial Conduct Authority and provides pension services. The firm is on the Financial Services Register, registration number 460304. Registered in England and Wales number 5817049. Registered office: 55 Gracechurch Street, London, EC3V 0RL. The Royal London Group registered VAT number is 368 5244 27.