UK Budget 2014 – Pensions briefing note
The Chancellor’s 2014 budget introduced a number of changes to the UK pension’s regime, many of which were unexpected. The new measures are set out below:
It should be noted that the more significant proposals, set to come into effect from April 2015, are subject to amendment and consultation with industry stakeholders.
Flexible Drawdown – The minimum ‘secure pension’ requirement for UK flexible drawdown will reduce from £20,000 per annum to £12,000 per annum. This will allow a greater number of retirees’ flexibility in how they draw their pension benefits.
Trivial Commutation – For eligibility purposes, the maximum sum of UK pension wealth will increase from £18,000 to £30,000. This allows individuals with limited pension provision to draw their benefits as a lump sum from age 60. The 25% Pension Commencement Lump Sum (PCLS) allowance which is not subject to UK tax applies and the balance is taxable at the recipient’s marginal UK income tax rate.
Trivial Commutation of Small Pots – The limit for the trivial commutation of small occupational pensions that may be commuted is unlimited. In addition, the number of personal pension pots that may be taken under these rules will increase from two to three. As above, 25% of this will not be subject to UK tax and the balance is taxable at the recipient’s marginal UK income tax rate.
Capped Drawdown (income) limit – The maximum annual capped drawdown pension will increase from 120% of the UK Government Actuary’s Department (GAD) rate to 150%.
Proposed Changes from April 2015
Flexible Defined Contribution / Money Purchase benefits – The rules are to be simplified so that anyone with a UK Defined Contributions pension will be able to draw their entire pension fund as and when they wish from age 55. There will be no minimum income requirement in order to qualify. The 25% PCLS allowance will remain and the balance of the lump sum will be taxed as income at the individual’s marginal UK income tax rate. The option of using the pension fund to purchase a pension annuity or to enter into Capped Drawdown will remain.
Review of 55% lump sum death benefits tax charge – The government intends to review the 55% lump sum death benefits tax charge and replace it with a lower charge. It has been suggested that this may be an income tax charge although the details are yet to be confirmed.
Restrictions on transfers from Public Sector Pensions – The government intends to introduce legislation to restrict transfers from Public Sector Pensions to Defined Contribution Schemes, except to undefined limited circumstances. They are concerned that the new rules may provoke a significant outflow from public sector pensions to more flexible Defined Contribution Schemes. As most Public Sector pensions operate on an unfunded basis (not to be confused with ‘underfunded’), this would create an immediate cost to the exchequer.
Possible restrictions on transfers from Private Sector Defined Benefit Salary Related pensions – The Government is concerned that the proposed changes may prompt a significant outflow from Private Sector Defined Benefit pensions to Defined Contribution pensions. They believe “this could have a detrimental impact on the wider economy”.
To counter this they have put forward the following proposals:-
- To prohibit Defined Benefit to Defined Contribution pension transfers unless there are exceptional circumstances.
- Continuing to allow Defined Benefit to Defined Contribution transfers provided the current more restrictive Defined Contribution regime applies post transfer.
- Placing an annual cap on Defined Benefit to Defined Contribution pensions.
- Allowing transfers to Defined Contribution schemes at the scheme trustees discretion.
- Not placing any restrictions and offering Defined Benefit scheme members’ full flexibility.
The government is seeking feedback from industry stakeholders on these proposals and the practical implications of any changes.
QNUPS – The budget briefly mentioned QNUPS and plans to consult on measures to reduce its effectiveness to avoid IHT. We await further detail on this measure although expect QNUPS to remain a useful planning tool provided used for retirement purposes.
Increased Minimum Pension age – It is proposed that the minimum pension age will increase to 57 by 2028 and rise in line with state pension age increases thereafter.
Q&A: IMPACT ON QROPS
What is the reason for these changes?
Recent thematic reviews have acknowledged that the UK annuity market is unfit for purpose; these proposals facilitate an alternative means of taking retirement benefits. Should the proposals come into force, the UK government expects and additional tax take of £1.2 billion by 2018.
Will I be able to increase my annual QROPS Capped Drawdown pension to 150% of the UK GAD rate?
Yes, existing members may request a recalculation of their income limit (at an additional fee charged by the Pension Trustee), even if their pension income review date is not near. Members whose income review is near will have their income limit recalculated at no additional cost on their upcoming annual pension anniversary date. This runs from the original pension commencement date. Members just commencing Capped Drawdown will automatically have their pension calculated on the new basis after 27th March 2014.
Do the changes mean I will be able to commute my entire QROPS fund for a lump sum from April 2015?
A QROPS is subject to dual compliance with both HMRC rules and the pension rules of the jurisdiction where it operates for example (Guernsey, Malta or Gibraltar). Currently the status quo will remain as it is not clear whether or not HMRC will allow QROPS jurisdictions the same access to the proposed changes outlined in the recent budget. Additionally the changes proposed to pensions by the Government are subject to amendment and consultation with industry stakeholders.
Should I not keep my pension in the UK and draw it as a lump sum at retirement?
Although the additional flexibility may appear attractive, commuting a UK pension in full is unlikely to be tax efficient for the following reasons:-
- Only 25% of the UK pension would be exempt from UK tax with the balance taxed at the individual’s marginal UK income tax rate of up to 45%.
- Once the pension has been commuted, the funds or assets are held personally and may be subject to Capital Gains tax or Income Tax wherever the member resides.
- The commuted funds / assets will form part of the individual’s estate on their death. Where the individual is UK Domiciled this will likely mean a further tax charge of 40%. Assets held within a QROPS are exempt from this.
Do the proposals impact the UK Lifetime Allowance?
No, as expected, the UK Lifetime Allowance (LTA) remains in force and reduces to £1.25m from 6th April this year. The restrictions of the LTA do not apply to a QROPS. A further reduction in the LTA in future years is a distinct possibility.
I reside outside of the UK. Can I commute my UK pension as a lump sum and obtain relief from UK income tax under the provisions of the UK’s Double Taxation Agreement (DTA) with my country of residence?
This is yet to be clarified by HMRC. It is likely that restrictions may be imposed to minimise tax leakage. Many countries such as the TRNC do not have a DTA with the UK meaning that pension income will always be fully taxable in the UK.
Will a QROPS still provide more tax efficient death benefits?
Yes, for the longer term non-UK tax resident member, a QROPS is likely to be more tax efficient on death. The UK government has confirmed that it is reviewing the 55% lump sum death benefits tax charge. However it is likely that death benefits from a crystallised UK pension will still be taxed although possibly at the individual’s marginal income tax rate (up to 45%). Provided a QROPS member is not UK tax resident at the time of death and has already completed five full complete and consecutive UK tax years as a non-UK tax resident, there will be no source taxation of the QROPS death benefits.
Any legislative changes which increase consumer choice should be welcomed. Industry Technicians are confident that QROPS remain a very useful retirement option and present a number of advantages for certain individuals.
We will release further information as the legislation is finalised. Please contact Scott or Leeann with any questions in the meantime.
Astute Financial Management Associates Ltd
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Astute FMA are Independent Financial Advice Consultants & act as Financial Intermediaries ONLY. We are not a bank, we do not accept deposits & we do not hold clients’ money. Astute FMA are fully Licensed to act as Independent Financial Advice Consultants in North Cyprus. Astute FMA are fully Licensed & Regulated by the TRNC Government. License No: MŞ11504
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