The Taxation of Pensions Bill – What’s in store for 2015?

The draft Taxation of Pensions Bill was published in August 2014 and was subject to a 4 week consultation. 

The results of the consultation are now contained within the Taxation of Pensions Bill, which runs into 60 pages, and has now been introduced into the House of Commons.

Heres the ten key points of interest:

1.Scrapping the 55% tax charge on death

The Bill carries through on the promise to scrap the 55% tax charge on death in drawdown post age 75 and on crystallised funds. The tax charge has been cut to 45% and now only applies where death occurs after the age of 75. The charge will also be levied on value protected annuities and pension protection lump sums from Defined Benefit schemes.

2.Accessing capped drawdown now to retain the £40,000 annual allowance

Anyone already in capped drawdown before 6 April 2015 can continue to make contributions up to the £40,000 annual allowance. Individuals must stay within their capped limit and not access the new flexibility. Accessing the new flexibility or designating new funds for drawdown through a separate arrangement will see the annual allowance cut to £10,000.

3.Capped drawdown transfers

Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 annual allowance. However, the annual allowance will be cut to £10,000 if an individual wishes to access the new flexibility following transfer.

4.When the £10,000 reduced annual allowance will apply

A reduced annual allowance of £10,000 applies when someone accesses the new flexibility. The Bill includes three new events which would see the annual allowance cut:

  • Taking out a `flexible annuity which allows or could be varied to allow decreases in the amount of annuity.
  • Becoming entitled to a scheme pension from a money purchase scheme where there are fewer than 11 other people entitled to payment of scheme pension under the scheme.
  • Someone with primary protection taking a stand alone lump sum.

5.No UFPLS from some divorce pension credits

The Bill confirms that an Uncrystallised Funds Pension Lump Sum (UFPLS) cannot be paid from a disqualifying pension credit. This pension credit paid as a result of divorce and where credit has come from a pension in payment and from which tax free cash has already been taken. These pension credits are fully taxable to prevent anyone getting two bites at the tax free cash cherry.

6.Reduced tax free cash recycling limits

Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This has now been cut further to £7,500.

7.Lower minimum pension ages for triviality and small pots

Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum has been reduced to 55 (or earlier if under ill-health rules).

8.Revised valuation basis for pre A-Day pensions in payment

Pre A-Day pensions in payment are valued for the lifetime allowance purposes at the date of the first post A-Day Benefit Crystallisation Event (BCE). For those in drawdown this is changing from 25 x the maximum capped drawdown income, to 25 x 80% of the maximum capped drawdown. This will counteract the effects of the increase in the income limits in March 2014 from 120% to 150% GAD.

Those expecting to breach the LTA with their first crystallisation event since A-Day may wish to defer taking benefits until the new calculation method is in place. This will be effective where the first BCE event occurs on or after 6 April 2015. Originally this was intended to apply from the first BCE after the Act was passed.

9.New rules on transferring low pension ages

Restrictions on transferring pensions with a protected low pension age are to be lifted. It will be possible to transfer to a new scheme and continue taking income while still below age 55, without is being part of a block transfer.

10.Anti-avoidance rules when taking benefits while non-resident

Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax. The Bill expands the rules to include the new flexible income options and now also includes `flexible annuity and `money purchase scheme pensions. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.


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