Another day, another slew of headlines proclaiming - or bemoaning - the latest wave of changes that have been announced as part of the government’s radical pensions taxation reform agenda.
In truth, the ululations yesterday (14 October) over the uncrystallised lump sum - which is now being pronounced as a spoken acronym, ‘Uff-pulls’, by some - were exaggerated. Neither the option itself, nor anything disclosed about it, was new as it had been disclosed back in August.
What happened was the government published the updated draft of the Taxation of Pensions Bill, which will bring all of the reforms into effect and contained some key confirmations and essential new details.
Here are 10 key takeaways from the draft rules:
1. All four options for pensioners are present and correct.
Yep, those hitting retirement will now have four options open to them: buy an annuity, enter the rebranded ‘flexi-access’ drawdown, take flexible lump sums from their uncrystallised pot, or take an ‘authorised taxed lump sum’ of the whole pot and buy a supercar or a buy-to-let property.
2. You can treat your pension like a bank account. Well, almost.
Turning to the issue that was dominating the news yesterday, the government has confirmed that uncrystallised lump sums can be taken on an ad-hoc or regular basis.
This sort of means you can treat your pension fund as a bank account except there will be restrictions on what you can continue to put in under the new annual allowances and you’ll be taxed under the new rules.
This last point is important: despite some speculation that members could draw down their tax-free allowance and leave the taxed portion untouched, each lump sum will include a 25 per cent tax-free portion with the remainder taxed at marginal rate.
3. Open access lump sums not open to all.
As expected, a member will not be able to use UFPLS (we’ll stick with the initialism thank you very much) if they have either primary or enhanced protection and a right to a tax-free lump sum of greater than £375,000 on 5 April 2006.
They’ll also be precluded if they are entitled to a lifetime allowance enhancement and the available portion is less than 25 per cent of the amount they are seeking to withdraw.
Other details:
• any amount paid that exceeds available lifetime allowance (currently £1.25m) over the age of 75 will be taxed as income; and
• under the age of 75 if the amount paid exceeds the remaining lifetime allowance, the tax-free portion will be capped at 25 per cent of the remaining allowance.
4. Crackdown on recycling tax-free cash...
In an attempt to stop people using tax-free allowance in combination with the new flexibilities to ‘recycle’ money and generate “artificially high levels of tax relief”, the aggregate amount from tax-free sums that be reinvested in this way will be reduced to £7,500 in any 12-month period.
5. ... but annual allowance loophole remains.
To close the loophole the new rules threw up the government had already announced that when a trigger event occurs - so if a fund enters drawdown or an UFPLS is taken - this will reduce the annual allowance to £10,000.
This was confirmed in the draft rules, which also reduced annual allowance for flexible annuities, but the carve out for capped drawdown funds prior to April 2015 remains. This creates a planning opportunity to retain a client’s £40,000 higher allowance, explained during our live workshop last Friday.
6. Annual allowance calculations got complicated.
Another consequence of these annual allowance changes is that the calculation for some clients will get complex, and involves working out their ‘money purchase input subtotal’ minus the new £10,000 allowance, plus the ‘defined benefit input subtotal’ minus the remaining £30,000 of the old limit.
If you want to see the best explanation of this that I’ve found (it wasn’t brand new so some had done the leg work on this already) check out this commendably concise technical note from the PruAdviser website.
7. One more death charge escaped.
We already knew following the latest bombshell announcement at the end of last month that the 55 per cent death charge was being removed, with beneficiaries of those who die under the age of 75 paying no tax whatsoever and others paying no tax on the transfer and marginal rate on withdrawals or 45 per cent on lump sums.
Subsequent clarifications also confirmed this would apply to value-protected annuities and certain defined benefit scheme lump sums on death.
These draft rules also confirmed that where a member has selected to take an annuity but died before they were able to select an insurer, the payment will no longer be treated as an unauthorised payment and therefore will escape the 55 per cent tax charge that would have applied.
8. Ex-pats have not been excluded...
As we thought qualifying registered overseas pension schemes and other similar overseas structures will be subject to these rules where payments into them have benefitted from UK tax relief. Payments that are the equivalent of the new lump sums will also trigger a reduced annual allowance.
9. ... but temporary non-residents beware.
While we’re on overseas issues, it’s worth noting that where withdrawals from a scheme during a temporary period of non-residence exceed £100,000, the whole amount will be taxed as income.
10. Treasury windfall could rise.
And finally, for those who thought the Treasury tax boost was the major motivation behind the new freedoms, the rules included an impact statement which detailed the initial windfall it expects: more than £3.8bn in the years to 2019/2020.
It could also rise from here, as new announcements have come since the figures were run. The Autumn Statement will confirm the final numbers.
