The frenetic activity of tax year end has now subsided. Thoughts now turn to 2015/16. Radical changes affecting savings and financial advice may lead to conventional wisdom being turned on its head.
Individuals now have more control, choice and responsibility over their retirement savings than ever before. They’ll need help to understand what this means at every step of their retirement journey, from saving towards retirement, taking an income and preserving what’s left for their families.
Here’s a quick reminder of what has changed from 6 April 2015.
Pensions are now instantly accessible for the over 55s. Essentially the new rules introduce flexible drawdown for the masses.
Providers offering flexi-access drawdown will allow individuals to take as much or little as they want from their pension whenever they want it and however they want to take it.
Uncrystallised Funds Pension Lump Sums (UFPLS) have been introduced as a way to allow some older schemes which don’t offer drawdown access, at least in part, to some of the new flexibility.
If UFPLS is the only available flexible income option, it means that it’s not possible to take some or all of your tax free cash and defer taking an income – so UFPLS triggers the drop to a £10k annual allowance with no carry forward for money purchase schemes.
There’s also some additional flexibility for annuities – income will be able to go down as well us up from April and guarantees of more than 10 years will be possible.
On death before age 75, survivors’ annuities can be paid to any beneficiary (no longer just dependants) tax free where:
- income payments start on or after 6 April 2015;
- the date of death was after 2 December 2014;
- and, if provided from uncrystallised funds, it comes into payment within two years of death
Reduced Annual Allowance for taking flexible income
The price for accessing the new flexibility is that the annual allowance is cut to £10,000 for money purchase schemes. But the full £40k allowance can be maintained if just tax free cash is taken or for anyone already in capped drawdown prior to 6 April 2015 who remains within the income limits.
Pension Death Benefits
The 55% tax charge on drawdown lump sum death benefits has been scrapped. It’s possible for anyone to inherit a drawdown pot and continue drawing an income from it, removing the previous restriction that only dependants can carry on in drawdown.
- On death before 75, death benefits (except scheme pensions) can normally be paid tax free within the Lifetime Allowance (LTA). In a change from the original proposals, this now applies to survivors’ annuities and pension guarantee payments as well as inherited drawdown pots.
- On death at 75+, death benefits will be taxed as the recipient’s income, when they draw the funds. For 2015/16 only, non-drawdown lump sums will be taxed at a flat rate of 45% – but income tax will apply to all post-75 death benefits from 2016/17 onwards.
- The old tax distinction between crystallised and uncrystallised pots has largely gone. Within the LTA, the tax treatment will normally be determined by the deceased’s age at death.
- Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it.
These changes make pension wealth far more inheritable than ever before. But it’s important to ensure that an individual’s current pensions will allow them to access the flexibility they need before it’s too late.
DB – DC Transfers
Transfers from unfunded public service defined benefit (DB) schemes to defined contribution (DC) schemes will be blocked, unless the transfer request was made before 6 April 2015.
It’s now only possible to transfer private sector and funded public schemes, such as the Local Government Scheme to DC schemes.
Spouses and civil partners whose partners died after 3 December 2014 are now eligible for an increased ISA allowance equal to their late partners ISA value at the date of their death.
This will allow the survivor to continue to benefit from tax free investment returns. The spousal IHT exemption will mean there’s no IHT due if the surviving partner inherits the ISA funds. But those funds will be an asset of their estate.
Savings rate band changes
The savings rate band has been more than doubled to £5,000 and the rate cut from 10% to zero. For a non-taxpayer this could mean a tax free allowance of £15,600 when combined with their usual personal allowance.
It could be good news for some offshore bond savers as gains from offshore bonds are treated as savings income. And if they’re able assign to a non-taxpayer or manipulate their income under the pension freedoms to make themselves a non-taxpayer, then some of the gains could become tax free.
Source: Standard Life