Finance Act 2016 flexibility changes

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

A number of small changes to the pension flexibility rules were announced in the March 2016 Budget. They were subsequently included in the Finance Act 2016 and took effect from 16 September 2016 (the day after the Finance Act 2016 received Royal Assent). The changes relevant to Aegon’s products are summarised below:

There have been two changes to the serious ill-health lump sum rules:

  1. Prior to 16 September 2016, serious ill-health lump sums could only be paid out of funds where no benefits had previously been taken. In other words, the arrangement the funds were held in had to be uncrystallised so no part of it could previously have been crystallised and used to provide pension benefits. For serious-ill health lump sum payments made on or after 16 September 2016, it will be possible for a serious ill-health lump sum to be paid from uncrystallised funds held in an arrangement even if part of the benefits held in the arrangement have previously been crystallised. For Aegon products, this could be of relevance to SIPP platform wrappers where part of a wrapper can be crystallised (for example, funds are put into drawdown or used to buy an annuity) leaving the remainder uncrystallised. Prior to 16 September 2016, it wouldn’t have been possible for the uncrystallised rights to be taken as a serious ill-health lump sum in this situation. To take advantage of this change, all of the uncrystallised funds remaining in an arrangement must be paid as a serious ill-health lump sum – it isn’t possible for a partial lump sum to be paid. Please note, it’s still not possible to pay a serious ill-health lump sum from crystallised funds of any kind, including from capped drawdown and flexi-access drawdown funds.
  2. When a serious ill-health lump sum is paid to someone aged 75 or over, it will now be taxable at the individual’s marginal tax rate rather than at 45%. This change will apply only to serious ill-health lump sums paid on or after 16 September 2016. 

Before the Finance Act 2016 came into force, if a capped drawdown or flexi-access drawdown fund was set-up for a dependant under age 23 on a member’s death, the intention was for the dependant to withdraw all the funds before reaching their 23rd birthday. Any withdrawals made after the dependant reached age 23 would be treated as unauthorised payments.

For any capped drawdown or flexi-access drawdown fund set-up for a dependant under age 23 from 16 September 2016 onwards, the age 23 restriction will no longer apply. So, they will be able to withdraw funds after age 23 without them being treated as unauthorised payments.

Similarly, any dependant reaching age 23 on or after 16 September 2016 in a dependant’s capped drawdown or flexi-access drawdown set up before 16 September 2016, will be able to withdraw funds from their capped drawdown or flexi-access drawdown arrangement after age 23. Again, any such withdrawals will be treated as authorised payments. 

The charity lump sum death benefit rules are being altered to ensure similar treatment for uncrystallised and crystallised funds.

Before 16 September 2016, a charity lump sum death benefit could only be paid from a member’s uncrystallised funds if they were aged 75 or over when they died (where the member had no dependants and had nominated a charity to receive the lump sum payment). For funds in drawdown, no ‘age 75’ restriction applied, so a charity lump sum death benefit could be paid on the death of a member at any age. 

From 16 September 2016 onwards, it will be possible to pay a charity lump sum death benefit from uncrystallised funds on the death of a member at any age (where the member has no dependants and has nominated a charity to receive the lump sum payment). 

Pensions Technical Services