Pension freedom rules set to be changed

Pension freedom rules set to be changed

Changes are being made to the pensions tax rules less than a year after the introduction of pension flexibility in April 2015.

In a HM Revenue & Customs document published alongside the Budget today (16 March) the requirement that a serious ill-health lump sum can only be paid from an arrangement that has never been accessed is ditched.

The 45 per cent tax charge on serious ill-health lump sums paid to individuals who have reached age 75 will also be replaced with tax at the individual’s marginal rate, according to the HMRC document.

Changes will also be made to the rules to enable dependants with drawdown or flexi-access drawdown pensions who currently have to use all of this fund before age 23 or pay 45 per cent tax charges of up to 70 per cent on any lump sum payment, to continue to access their funds as they wish after their 23rd birthday.

The rule on paying a charity lump sum death benefit out of drawdown pension funds and flexi-access drawdown funds will also be removed where the member dies before the age of 75 because the equivalent tax-free payment may be made as another type of lump sum death benefit.

Money purchase pensions are also set to now be allowed to make a payment as a trivial commutation lump sum.

The full amount of dependants benefits will also be able to be paid as authorised payments where there are insufficient funds in a cash balance arrangement when the member dies.

The rule changes are set to have effect on the day after the date of Royal Assent to Finance Bill 2016.

The amendments come two years after Budget 2014 saw the government announce the introduction of pension flexibility.

Pension flexibility allowed individuals aged 55 and above to access their money purchase pension savings as they wish, subject to their marginal rate of tax.

In September 2014 the government made a further announcement in relation to the taxation of pension death benefits.

These changes were set out in the Taxation of Pensions Act 2014 which took effect from 6 April 2015.