PensionsOct 17 2014

Your technical pension freedoms questions answered

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Andrew Calder asked: If a client has an existing drawdown policy will they be able to revert and in future strip out their full fund after April?

David Trenner: Yes, subject to the policy rules and the provider being prepared to change them. For example, three years after flexible drawdown was introduced a number of large providers were not facilitating it.

Samantha John asked: What are the compliance issues of having clients strip their pensions out?

DT: The compliance issues are the same as for any other advice.

Record their assets and objectives as well as their attitude to risk and priorities. Put in writing warnings about tax payable and any concerns, how they will live once the money is gone. Get them to sign off on their understanding of these issues.

Keep things very simple so that they cannot say they did not understand.

David Hill asked: Client in drawdown died in December 2013. What happens if the drawdown fund has not yet been settled to beneficiary?

DT: Tax will be based on the date of payment, so as long as the payment is not paid until after April the new rules will apply. This means the fund can be passed tax free at this time, and if the client was under 75 at death any withdrawals will also be free of tax.

Most death benefits have to be settled within two years of death, so they should have until December 2015 to take the lump sum.

An interesting question is what happens if the lump sum has already been paid and taxed: can it be returned and paid out again tax free after April? And if not, will the Financial Ombudsman Service decide someone was to blame?

Kim North asked: What are the pros and cons of non-advised drawdown? Will non-advised drawdown be allowed?

FTA: It seems entirely possible that a member could opt to go into flexi-access drawdown without advice, potentially after receiving ‘guidance’. The industry has called for the FCA to update its approach, which might give providers a steer on whether to insist on advice.

DT: Non-advised drawdown is an accident waiting to happen. While the consumer saves money on fees, they miss out on advice.

Drawdown requires decisions, such as how much income is sustainable, what happens if this is less than you require, where to hold short term funds to pay income and longer term funds to achieve critical yield?

Crucially, especially post April 2015, drawdown will require decisions as to if and when to partially annuitise and how much annuity to buy each time.

These decisions require advice.

Tony Turner asked: Will longer 10-year guaranteed periods on annuities come at the cost of much of the cross subsidy benefit?

DT: Yes, longer guaranteed periods will lose some mortality cross subsidy, but by no means all of it.

In the late 1970s a man aged 65 might expect to get 12 to 14 years of pension so a 10-year guarantee covered about 70 to 80 per cent of the pension, but today a 65-year-old can expect to live for about 22 to 24 years. So a 20-year guarantee should cost about the same as a 10-year guarantee cost 35 years ago.

Roy England asked: Under the new rules, will it be possible to transfer a Sipp to a low-tax regime and withdraw the fund in one amount less local taxes?

DT: This sounds like a Qrops to me. HM Revenue and Customs tightened the rules in 2012 to block New Zealand Qrops, which allowed the full fund to be taken tax free.

Qrops income is taxable in the country of residence, so the issue is not where your money is but where you are. Although noises have been made about allowing Qrops to have the new flexibilities to date legislation has not changed.

FTA: The draft Taxation of Pensions Bill did state that rules would be read across to Qrops where money paid in was subject to UK tax relief, but what this means in practice is, as David says, a lot less clear.

Martin Helstern asked: What is the annual allowance for clients in capped drawdowm already?

FTA: £40,000 - and it will remain as such as long as the client remains within the limit, since the Budget 150 per cent of GAD.

An interesting point, which has been thrown up by those taking our CPD test on the webinar, is the annual allowance change for those in flexible drawdown currently. Under current rules their annual allowance is zero, so when they convert to FAD their allowance will actually rise to £10,000.

An anonymous contributor asked: Value protected annuities are taxed in the same way as drawdown post age 75. Is this right?

FTA: Yes. So the payout would be subject to the new lump sum death charge of 45 per cent.

Saresh Shah asked: Are there any changes on recycling rules? Is that covered by the reduction in annual allowance?

FTA: The draft Taxation of Pensions Bill lowered the limit on recycling tax-free cash to £7,500. It was to be set to £10,000, but was squeezed further amid concern over people using the new freedoms to boost tax relief.

To watch the debate about pensions reforms in full and earn 30 minutes CPD, click here.