Towers Watson says that the draft Taxation of Pensions Bill, which was published today, provides some further details of how people can go about accessing defined contribution pension savings flexibly from April 2015:
- The draft Bill formally introduces the concept of “flexi-access drawdown” (FAD). There will be no restrictions on how money can be withdrawn from FAD funds by people over the minimum pension age (currently 55), although no more than 25% can be paid tax-free. Where a scheme does not offer this facility itself, members can transfer their savings to a FAD fund; entitlements to transfer are expected to be strengthened through the Pension Schemes Bill, which is also going through Parliament this year.
- Pension schemes can also choose to offer members ad hoc payments called “Uncrystallised Funds Pension Lump Sums”. 25% of these payments would be tax-free and 75% would be subject to tax. Unlike paying 25% of the fund as a tax-free lump sum up front, these withdrawals would not force the member to allocate the remainder of their savings to a drawdown vehicle at the same time or to an annuity within six months.
Dave Roberts said: “How it makes sense to take money out of a pension can depend on the individual’s circumstances. If they are still working and don’t expect their future retirement income from other sources to use up their full tax allowance, they might prefer tax-free withdrawals now and taxable withdrawals later.”
For older workers who start accessing their DC savings flexibly, the draft Bill also implements the reduced annual allowance of £10,000 in respect of subsequent DC contributions, which was unveiled last month.
Dave Roberts said: “For people who might want to pay more than £10,000 a year into a pension in future, this is another thing to think about when it comes to the best way to access pension income. The reduced annual allowance would be triggered if someone took £10,000 out of a £100,000 pot and paid tax on three quarters of that money. But it would not be triggered if they took out £25,000 tax-free, as long as they did not withdraw a penny more.”
As announced last month, the draft Bill removes restrictions on how annuity products have to be designed – for example, it will be possible for insurers to offer annuities that reduce once in payment or which offer guarantee periods longer than 10 years. In addition, the draft Bill removes the requirement that people receiving annuity income must have had the opportunity to select the annuity provider.
Dave Roberts said: “At first sight, this looks like a move away from the Open Market Option, but we doubt that will be the effect: schemes will continue to offer it and, if they did not do, the member could still transfer. Instead, this corrects a flaw in the current legislation: in theory, a member buying an annuity could receive a tax penalty through no fault of their own if the scheme did not offer them a choice of provider.”
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