City Trustees - part of Mattioli Woods



News and Media

20 May 2014

Budget changes - pension flexibility and changes to Finance Bill 2014

On 27 March the government announced it would bring forward legislation in Finance Bill 2014 to ensure that people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying a lifetime annuity.

In practice, it will still be up to pension schemes and providers to decide the options under the new flexibility that they will allow, so people who want to use the new pension flexibility will find themselves in many different situations. City Trustees pension schemes are fully flexible and already able to take advantage of the budget changes.

HMRC has recently provided more information to help people who want to use the new flexibility. This information is for people who have:

  • received a tax free lump sum after 27 March 2014
  • received a tax-free lump sum on or before 27 March 2014, and either
    • cancelled an annuity contract within the cooling-off period on or after Budget day (19 March 2014) that was linked to that lump sum
    • not yet decided how to access the rest of their pension savings

Further detail is set out below on whether or not the unravelling of actions that were taken shortly before the Budget changes were announced will give rise to a tax charge. This information relates to how the tax rules will apply. All references to an annuity mean a lifetime annuity.

Individuals who can already take advantage of the new flexibility

Members can already take advantage of pension flexibility in the following circumstances without waiting for changes to the Finance Bill if:

  • Member has given instructions to receive benefits but the pension scheme has not paid tax-free lump sum or set up the annuity
  • The pension scheme has paid the tax-free lump sum, and bought the annuity but the member cancelled the annuity contract within the cooling-off period and entered into drawdown with the pension scheme
  • The pension scheme has paid the tax-free lump sum, the annuity contract is set up but the total pension rights (in all pension schemes including those in payment and any tax-free lump sums) are £30,000 or less and the member meet all the requirements to immediately take the annuity as a taxed lump sum (the annuity contract must be turned into a lump sum, which is taxed, not cancelled in these circumstances)
  • The pension scheme has paid the tax-free lump sum, the annuity contract is set up but the value of the annuity is £10,000 or less and the member meets all the requirements to immediately take the annuity as a taxed lump sum (the annuity contract must be turned into a lump sum (which is taxed), not cancelled, in these circumstances).

For any further details regarding the trivial commutation or small lump sum requirements mentioned in the last two points above please contact us.

Individuals who will be able to use the new flexibility

The government will introduce legislation in Finance Bill 2014 so that if the member wants to take advantage of pension flexibility after changes are made in Finance Bill 2014 and they have recently received their lump sum, it will remain tax-free in the following circumstances:

  • The pension scheme has paid the tax-free lump sum, the member has bought an annuity but cancelled the annuity contract within the cooling-off period and both the annuity purchase price and the lump sum have been paid back to the members pension scheme
  • The pension scheme has paid the members tax-free lump sum, they have bought an annuity but cancelled the annuity contract within the cooling-off period and while the member has kept the lump sum, the purchase price for the annuity either
    • has been paid back to your pension scheme
    • is held temporarily by the firm that arranged for the member to cancel the annuity contract
    • is transferred to another firm in order to access drawdown

If the option of keeping the lump sum is open to the member and the member decides to do so, they will need to be aware that they will have received the final value of their tax-free lump sum, even if the rest of their fund value changes before they take advantage of the new flexibility either from 27 March 2014 or April 2015.

If the member has recently received their tax-free lump sum and cancelled the annuity contract or not yet decided how to access the rest of their pension savings, City Trustees will be able to help you find a solution for the member so that their lump sum remains tax-free. However, even where the member can use this new flexibility, they may still need to wait for new legislation to take effect to access their funds.

Members will also be able to use the pension flexibility from April 2015 if they receive a tax-free lump sum after 27 March 2014 under either:

  • the scheme that paid the lump sum
  • another scheme to which the member has transferred the funds in order to access drawdown

Individuals who already receive their pension income

These changes will not apply to member if they have received a tax-free lump sum, and started to receive an income and the cooling-off period has ended. The member will remain bound by the contract made with their annuity provider.

City Trustees

If you require any advice regarding the changes to pension legislation, please contact us. For IFAs, City Trustees operates a free technical helpline for support with all pension challenges. Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk today.

 

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