April 2015 sees the introduction of the new pension freedoms, and there is much speculation as to who will benefit the most from the biggest change to pensions in a generation
The traditional nudge into annuities has been removed, with new annuity plan numbers at approximately 50 per cent of pre-2014 Budget figures and some sources predicting a further 50 per cent decrease post-April. What remains is an unrestricted market, where people can choose the solution that suits their own requirements.
It was an eventful 2014 for Sipps as well. August saw the release of two sets of rules affecting the market. Together these introduced greater emphasis on a provider’s own due diligence processes for investments and revised classification of standard and non-standard assets, as well as clarifying new capital adequacy requirements, effective from September 2016.
Post-April pension changes
In spite of the gloomy outlook, annuities will remain a popular choice for many savers – for at least part of their funds –seeking secure lifetime income. Additionally, newer style annuities offer income which can increase or decrease as well as removing guarantee period limits, enabling savers to choose at the outset how long the annuity will be paid for.
Everyone is aware that clients can take withdrawals, either from capped drawdown plans set up before April, or from flexi-access drawdown (Fad) plans. Capped plans can switch to Fad at any time but cannot change back. Alternatively, money can be taken in the form of an uncrystallised fund pension lump sum (UFPLS), either as a partial withdrawal or by taking the full fund.
Fad will offer them the same options as UFPLS, but with additional flexibility over how to split the tax treatment of withdrawals. In other words, savers can choose to take tax-free cash alone, take the cash plus subsequent amounts as taxable income, or use phased withdrawals, which are partially taxable.
A new annual allowance – the money purchase annual allowance (MPAA) – will apply to all savers taking income through any of the new options, reducing the allowance from £40,000 to £10,000. Savers in capped drawdown will continue to benefit from the higher allowance until they choose to move into Fad. The new allowance will apply to money purchase pensions only, and savers accruing benefits in a final salary scheme will see this assessed separately.
Passing on unused pensions
is changing, offering savers
new choices about who can receive monies and how these amounts will be taxed. Reaching age 75 changes how beneficiary withdrawals are taxed. Paying death benefits before this age allows beneficiaries to withdraw income tax free. However, once the saver passes age 75 the withdrawals are paid less 45 per cent tax (although it is expected that the tax deduction will change to the beneficiary’s marginal rate, from the start of tax year 2016-17).
These new rules will also apply to beneficiaries looking to pass on unused funds to their successors, allowing multi-generational succession planning with pensions for the first time. As pensions usually remain outside of the estate, their importance in inheritance tax planning will increase.
