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.
