And in other changes...
These FAQ are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.01 April 2015
The headlines about the April 2015 pension flexibility rules tended to focus on changes to how pension or death benefits can be paid from 6 April 2015. However, there were other less publicised changes that took effect which are well worth being aware of. Here’s a summary listing some of these changes:
A pension credit is a transfer payment that a person receives from their ex-spouse’s or ex-civil partner’s pension arrangement as a result of them agreeing to pension sharing on divorce. If a pension credit is disqualifying, this means that tax-free cash cannot be paid to the recipient of the transfer payment as the transfer has been made from a drawdown fund or an annuity in payment from which tax-free cash will already have been paid.
From 6 April 2015, any uncrystallised funds derived from a disqualifying pension credit can’t be paid as an uncrystallised funds pension lump sum (UFPLS) when pension benefits are being paid. The reason for this is that there is a 25% tax-free cash entitlement from an UFPLS but all benefits paid from a disqualifying pension credit must be taxable. If someone with a disqualifying pension credit wants to commute the whole of their money purchase fund as a taxable lump sum after 5 April 2015, they may be able to do this using the small pots lump sum rules or the flexi-access drawdown rules. Otherwise, they may need to buy an annuity with the fund representing the disqualifying pension credit. If you want to find out more about the UFPLS rules, please read the article here.
There was a temporary relaxation of the block transfer rules for transfers made before 6 April 2015. The intention was to allow someone to keep their protected pension age and/or protected tax-free cash on transfer to another scheme without the need for a buddy to transfer with. Also, anyone using the relaxation in the rules could already have been a member of the receiving scheme with no 12 month restriction applying. To be a block transfer in this situation, the following conditions had to be met:
- The transfer must have taken place before 6 April 2015,
- The transfer must have been made in a single transaction of all the member’s rights under the transferring scheme, and
- The member must take all their benefits (not just the transferred rights) from the receiving scheme before 6 October 2015.
The standard block transfer rules apply to all block transfers made after 5th April 2015.
To support the pension flexibility rules, the Government wants people to have access to free, impartial guidance on the choices they have when deciding how best to use the defined contribution pension funds they have built up. This guidance service, called ‘Pension wise’, is provided in a variety of ways (web, phone and face-to-face) and is available from independent organisations, The Pensions Advisory Service (TPAS) and The Citizens Advice Bureau (CAB). People can, if they wish, opt to take and pay for independent financial advice in addition to or instead of using the guidance guarantee service. More information can be found on the ‘Pension Wise’ website(Opens new window).
The minimum pension age for taking pension benefits will increase from 55 to 57 in 2028 and will remain 10 years below the state pension age from then on.
If someone is able to take all of an uncrystallised pension fund as a stand-alone lump sum, this means that all of it can be paid tax-free. This stand-alone lump sum option would have originated from funds held in an occupational pension scheme before 6 April 2006 where all of the funds could have been paid as tax-free cash.
Payment of a stand-alone lump sum from 6 April 2015 will not normally trigger the money purchase annual allowance rules. The only exception to this is where the stand-alone lump sum is being paid to someone who has primary protection with registered tax-free cash. Anyone in this position who has multiple pension arrangements can choose where to take their tax-free cash from, so may decide to commute an entire pension arrangement for a tax-free lump sum. If this happens, and it is the first such stand-alone lump sum paid to them after 5 April 2015, then this triggers the money purchase annual allowance rules. In other words, this means that a person has flexibly accessed their pension benefits. If you want to find out more about the UFPLS rules, please read the article here.
Scheme managers or trustees are not compelled to provide benefits using the pension flexibility provisions and the rules of many pension schemes may not currently allow payments to be made using them. However, the Taxation of Pensions Act 2014 includes a permissive scheme rules override to be used so that scheme managers or trustees can choose whether or not to make any payments after 5 April 2015 using the pension flexibility provisions even if the scheme rules do not allow for this.
Under the tax-free cash recycling rules, there are four rules that need to be met for recycling to be deemed to have occurred. These are:
- On or after 6 April 2006, a person takes a tax-free lump sum from a registered pension which is more than 1% of the standard lifetime allowance either on its own or in conjunction with any other tax-free lump sum taken within the previous 12 months.
- Because of the tax-free lump sum, the contributions paid into registered pension schemes for a person are increased by more than 30% over the level of contributions that could have been expected.
- The additional contributions are more than 30% of the tax-free lump sum.
- The recycling was pre-planned.
Where tax-free cash is paid after 5 April 2015, the limit in point 1 is reduced from 1% of the standard lifetime allowance to £7,500.
From 6 April 2015, the maximum amount that can be paid tax-free is limited to 25% where an uncrystallised funds pension lump sum (UFPLS) is being paid. So, if someone is entitled to tax-free cash of more than 25% from their pension arrangement as protected tax-free cash, it will not be possible after 5 April 2015 for them to receive the protected amount if they want to take an UFPLS from that arrangement.
To allow as many people as possible to be able to use the pension flexibility rules, the government will continue to allow transfers after 5 April 2015 from:
- Private sector defined benefits schemes to defined contribution arrangements, and
- Funded public sector schemes to defined contribution arrangements.
However, there is a requirement for advice to be given as part of the transfer process where the transfer value of the benefits in the transferring scheme is £30,000 or more. This advice needs to be given from an FCA authorised adviser who is independent from the transferring scheme. In some situations, the advice may be paid for by the defined benefits scheme employer – for example, where a transfer is being made as a result of a restructure of the pension benefits being provided or where the employer is arranging transfers within the same scheme from a defined benefits arrangement to a defined contribution arrangement. Otherwise, the advice should be paid for by the individual. It’s worth pointing out that advice isn’t mandatory if the transfer value is below £30,000.
Any transfer from a defined benefits scheme where advice is required to be given is classed as a transfer of ‘safeguarded benefits’. This term can also include any arrangement that has guaranteed annuity rates or options (for example, in a defined contribution arrangement such as an occupational policy or a retirement annuity) and may also include section 32 buyouts and assigned occupational policies containing GMP. So, the advice requirement can apply to other types of arrangement – it’s not just to transfers from defined benefits or funded public sector schemes.
It’s not possible after 5 April 2015 to transfer from an unfunded public sector scheme to a defined contribution arrangement.
For more information on the transfer of safeguarded benefits and the advice requirement read the Pensions Regulator’s guidance here (PDF - 189kb)(Opens new window)
Pensions Technical Services