- Flexible Drawdown
With effect from April 2015, anyone will be able to take advantage of flexible drawdown, without the need to have (as is currently the case) a minimum guaranteed pension of £20,000 per annum. From 27th March the minimum pension required for flexible drawdown is reduced to £12,000.
Currently there is a tax charge of 55%. This will be reduced to the individual’s marginal rate of tax. While this could be as low as 20%, with a 40% tax rate at just under £32,000 and 50% at £150,000, there will still be a high tax charge to pay. It should also be borne in mind that if the pension fund is taken, and not spent, any amount left over on death will fall into the client’s estate for IHT purposes and potentially taxed at a further 40% (or the prevailing IHT rate at the time).
- Charge on death.
This is currently 55%, and is viewed as potentially too high. HMRC intend to consult with stakeholders on this, but with income tax at the marginal rate and IHT at 40%, it would seem unlikely that this rate will fall substantially.
- GAD rates will be increased from 120% to 150% from 27th March.
This means QROPS plans will also be able to pay higher incomes in the future, subject to the relevant changes to the scheme rules, which will most likely be automatic.
That is, where the whole amount that can be taken as a lump sum i.e. small pensions. This amount has been increased from £ 2000 to £10,000 per pension pot, and the total can include up to three pensions of £10,000. The total maximum triviality payment has been increased from £ 18,000 to £30,000.
5. Transfers from public sector schemes
Due to the above changes, the UK Government’s view is that this will have an effect on the number of people looking to move from final salary schemes to defined contribution schemes. As public sector schemes are underfunded, their view, taken from the briefing note, is as follows:
“ However, the government recognises that greater flexibility could lead to more people seeking to transfer from defined benefit to defined contribution schemes. For public service defined benefit schemes, this could represent a significant cost to the taxpayer, as these schemes are largely unfunded.
Consequently, “government intends to introduce legislation to remove the option to transfer for those in public sector schemes, except in very limited circumstances. “
This means that they will be seeking to disallow transfers from UK public sector schemes, (although it is not clear if this will apply to QROPS, as this is a different set of circumstances.
While the main focus of reporting seems to be around the ability to take the pension fund as cash, in reality this has always been the case via flexible drawdown, so the only change being considered in this consultation is the removal of the requirement to have a guaranteed income.
With income tax being paid at marginal rate, this would potentially increase the tax actually paid on the pension fund eg. A fund of £200,000 for a 60 year old could provide an income of around £12,000 at current GAD rates. This would (using UK tax rates) have a tax bill of £400 (20% on £2,000) and a net income of £11,600. Taking the amount as a lump sum would mean a tax bill of £73,623 and a net payment of £126,377, or just under 11 years’ worth of net income that could have been taken from the pension.