20 May Pension Freedom – January 2015
There have been significant changes to pension legislation through the Finance Act 2014 and the Taxation of Pensions Act 2014. Within this article we discuss the key changes and how they might impact on clients.
Income limits being removed
Income drawdown will be known as flexi-access drawdown from 6th April 2015.In theory you will be able to draw down all of your pension pot subject to your marginal rate of income tax. There are income and inheritance tax implications which need to be considered, but if someone does use the new flexible income rules they also need to be aware that they would then be subject to a much reduced annual allowance for on-going contributions.
Reduced Annual Allowance
A major drawback is that if, after April 2015, you were to take any further tax free lump sum and draw an income from this you would trigger a flexi-access drawdown account. This has the effect of reducing your allowable annual contributions. As soon as you access any fund under flexi-access drawdown, you’ll be subject to a £10,000 annual allowance for contributions. Any existing ‘capped drawdown’ won’t be caught as long as any income remains within the existing income cap.
New death benefit rules
The way in which a crystallised pension plan is taxed in death has been altered. The old rules stated that any lump sum death benefit paid from these funds would be taxed at 55%. The new legislation removes this taxation entirely for individuals who die before age 75. This rule change also means that any financial dependant inheriting this fund can draw down an income that will also be tax free, instead of taking it all as a tax free lump sum. By electing an income in this way instead of taking the lump sum helps inheritance tax planning as a pension plan is not included in someone’s estate for inheritance tax.
For an individual who dies after age 75, the taxation has been reduced from 55% to 45% for tax year 2015-16, and beyond 2015-16 it is proposed that the taxation will revert to the beneficiary’s marginal rate of income tax.
Change to financial dependants
The old rules on who could “inherit” a pension plan was restricted to a financial dependant which would typically be a spouse, disabled child or a child below the age of 23. The new rules allow anyone to inherit the pension plan.
This provides a little more flexibility in that you will be able to select other individuals to inherit your plan. Any inherited pots would not count towards the beneficiary’s lifetime allowance for pension purposes, and interestingly it would not be restricted to access at age 55. The proceeds would also be tax free if the deceased member died before age 75. Making this an extremely tax efficient way of passing accumulated pension wealth through the family.
New Expression of Wish elections
Due to the new flexibility of dependants you may wish to review your expression of wish.
Should Additional Contributions Be Considered
The new flexibility and more generous death benefit rules make pension saving much more attractive for everyone and make pension provision a very valuable estate planning tool also.
It is important to remember that under the current legislation higher rate tax payers continue to enjoy full tax relief at their marginal rate.
Pension Commencement Lump Sums
If you are considering taking a Pension Commencement Lump Sum but also to continue contributions, it is better to do this before 5 April 2015 if you wish to keep the Annual Allowance of £40,000 per annum and the ability carry forward unused allowances from the three previous years.
If you have any queries regarding any of the above please do not hesitate to contact your CDC adviser who will be happy to discuss the changes in greater detail.