UK Chancellors Autumn Statement 2014 – Impact on Pensions Regime
The UK Chancellor’s Autumn Statement 2014 was issued on 3 December. Many pensions industry commentators had expected this to clarify some of the still unanswered questions arising from the various proposed changes to the pensions regime issued throughout this year.
In reality, the statement appears to have confirmed the majority of the firm announcements issued thus far this year, without giving any further clarity as regards the unanswered questions.
This analysis concentrates on the main changes to private and public sector pensions rather than those applying to state pensions. The analysis also includes some reference to QROPS and international pensions.
Confirmation of previously announced points
The Chancellor has confirmed that as from April 2015, savers will be able to access their defined
contribution pension as they wish at the point of retirement, subject to their marginal rate
of Income Tax, instead of the current 55% charge for full withdrawal. Taken as a whole, the Government believes that the proposed changes will give savers much more flexibility to plan for retirement.
Free impartial advice
The Autumn Statement confirms that the proposed changes will be supported by free, impartial guidance to help people make “informed and confident decisions” about how they use their defined contribution pension savings.
Further detail on how this guidance guarantee service will be funded is still awaited, with Industry experts earlier this year labeling the Government "unrealistic" and "utopian" following FCA proposals to charge financial advisers a 30% levy in order to fund the guidance guarantee service.
Proposed changes to tax charges on death
The government has previously stated that it believes that people who work hard and save all their lives should be able to pass on their pension pot to the next generation.
The Autumn Statement has confirmed the recently announced changes from April 2015 to allow individuals to pass on their unused defined contribution pension savings to any nominated beneficiary when they die, instead of paying the 55% charge which currently applies.
If the individual dies before age 75, the beneficiary will pay no tax on the funds. If they die after age 75, the beneficiary will pay their marginal rate of Income Tax, or 45% if the funds are taken as a lump sum payment. From April 2016, lump sum payments will also be taxed at the recipient’s marginal rate. (Finance Bill 2015) (48) .
New Announcement regarding the taxation of annuities to dependents following the annuitant’s death
The government has announced in the Autumn Statement that from April 2015, beneficiaries of
individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any
future payments from such policies tax free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary.
Transfers from funded defined benefit schemes
As announced on 21 July 2014, the government will continue to allow transfers from funded
defined benefit schemes to defined contribution schemes in the context of the new flexibilities.
Transfers from unfunded public sector schemes will not be permitted post April 2015. Transfers from defined benefit arrangements will require advice from a UK FCA regulated adviser.
Small Pension pots rules
As announced on 21 July 2014, the government will continue the small pots rules for withdrawals from defined contribution pension savings from 6 April 2015. These rules allow individuals to take up to 3 small pension pots from non occupational schemes, or an unlimited number from occupational schemes, of up to£10,000 as a lump sum without being subject to a reduced annual allowance of £10,000. The government will also lower the age at which an individual can make use of these rules from 60 to 55 from 6 April 2015.
Pensions tax relief: the age 75 rule
Following informal consultation since the Budget 2014, the government has decided not to make changes to the age limit at which tax relief can be claimed on pension contributions. This will remain at age 75.
Points still requiring further clarification
The questions which still appear to require further clarification, apply primarily to the international pensions regime, i.e. QROPS and QNUPS. It is likely that further announcements and possibly consultations will occur in the months leading up to April 2015, which is the date from which the majority of the pension changes will come into effect.
QROPS - Flexible drawdown
There was a section in The Taxation of Pensions Bill issued In October which suggested that QROPS would receive the same flexibility as UK pensions from April 2015. It is expected that the implementation of the Bill will ensure that the new flexible drawdown rules available on UK registered pension schemes will also be open to QROPS. Further detail of how this flexibility will apply to QROPS has not yet been forthcoming.
Lifetime Allowance Regime
The Taxation of Pensions Bill also led to some headlines regarding Lifetime Allowance Planning. Page 6/7 of the Tax Information and Impact note stated:
“A number of consequential changes are made to FA 2004 and ITEPA 2003 to enable QROPS to make payments to members from uncrystallised funds, and for these to be tested against the lifetime allowance.
It is The QROPS Bureau’s view that this announcement has no impact on the responsible use of QROPS for Lifetime Allowance Planning. When The QROPS Bureau have discussed Lifetime Allowance planning we have stated that there will be tax paid on any excess over and above the Lifetime Allowance (at the date of transfer to QROPS) and that the transfer amount will still be included in any future LTA calculations.
This would not be impacted by the Taxation of Pensions Bill changes unless there was an intention to tax investment growth within the QROPS, which is an overseas scheme. We do not believe that HMRC would be able to tax investment growth in an overseas pension scheme and this has been confirmed with a leading pensions lawyer.
There was no further reference to this in the Autumn Statement.
The Taxation of Pensions Bill stated “Changes are being made to FA 2004 to give HM Revenue and Customs powers to make regulations requiring scheme managers or former scheme managers of Qualifying Recognised Overseas Pension Schemes (QROPS), to provide information about the scheme” This suggests that there will be increased reporting requirements for QROPS providers, but at this stage it is still not known what these will be.
The 2014 Budget stated that the government will consult on ways to give equivalent treatment to QNUPS and to UK registered pension schemes to remove opportunities to avoid Inheritance Tax (IHT). (Finance Bill 2015)
It may be that that HMRC want to tighten up on the commerciality and motive aspects of the transfer of assets abroad legislation, which SI 2010-51 QNUPS legislation has to comply with, and which are designed to ensure that the primary motive of establishing a QNUPS is pensions provision, rather than inheritance tax avoidance.
There has been no further detail on this in the Autumn Statement.
Please see attached PDF to download a copy of this analysis.