Summary and implications
This week's Budget has brought major change to the world of pensions. The headline policy is that individuals will, from April 2015, have full flexibility in what they do with their DC pension pots, with no requirement to purchase an annuity or enter into a drawdown arrangement. As a precursor to that, relaxations are being introduced from 27 March 2014 which will allow more members to take all their benefits as lump sums and make drawdown more widely available.
Many schemes will want to offer their members access to these options as soon as possible. As well as being popular with members, it will mean far fewer low-value benefits for schemes to administer.
New rules are also being introduced immediately to close a loophole used in pension liberation arrangements as well as giving HMRC wider powers to refuse to register pension schemes. Further changes will follow in September 2014, introducing a "fit and proper person" test for scheme administrators and allowing tax relief where a pension liberation arrangement is reversed.
Trivial commutation - lump sum increases to £30,000
From 27 March 2014, the trivial commutation limit will increase from £18,000 to £30,000. This means that a member can, from age 60, take all his pension benefit as a lump sum provided that his total savings in registered pension schemes do not exceed £30,000.
The new rule applies to all payments made on and from 27 March but the date on which the valuation of the benefits is made can be on any nominated date up to three months before the date of payment (so the £30,000 can be valued on any date from 28 December 2013).
As things stand, there is no equivalent increase to the value of trivial lump sums which can be paid on a scheme wind up - these remain at £18,000, and no account is taken of other pension savings. Neither is there any increase from £18,000 for trivial commutation lump sum death benefits.
Small lump sums - payments of up to £10,000 allowed
Current legislation allows lump sums of up to £2,000 to be paid as authorised payments, regardless of the value of other pension savings, in certain circumstances. The limit for all these payments will increase to £10,000 on 27 March 2014.
This should be particularly helpful to trustees of occupational pension schemes as they can discharge their obligations to all members with benefits worth up to £10,000, leaving them with far fewer small benefits to administer or buy out.
Also, members of personal pension arrangements can take up to three £10,000 lump sum payments (as long as each payment extinguishes all benefits under the arrangement). Currently only two payments of £2,000 are authorised.
Changes to drawdown rules
Individuals taking capped drawdown are currently restricted to taking 120 per cent of the value of an "equivalent annuity" each year. This is to be increased to 150 per cent for all drawdown pension years starting on or after 27 March 2014. This means some individuals may not be able to take advantage of this for a number of months, depending on the date on which they were first entitled to a drawdown pension.
Pensioners wishing to take flexible drawdown, and so not be subject to annual restrictions on how much they can withdraw, must satisfy a minimum income threshold (i.e. have a guaranteed minimum income from a combination of state pension, scheme pension and annuity). The minimum figure is being reduced from £20,000 to £12,000 on 27 March 2014.
Pensions liberation - tightening the net
The Budget includes a number of steps to help HMRC and the Pensions Regulator prevent pensions liberation.
From 20 March 2014 HMRC will be able to refuse to register a scheme (or decide to de-register a scheme) if it believes that it is not established or being maintained as a scheme for the provision of authorised payments. In addition, HMRC has new powers to require information from scheme administrators and others, to inspect documents and to levy fines for false information when considering an application for the registration of a scheme.
From September 2014 HMRC may refuse to register a scheme if it is of the opinion that the scheme administrator is not a "fit and proper person". Also from September 2014 there will be some tax relief when liberated sums are repaid into a registered pension scheme and former scheme administrators will remain on the hook for tax liabilities following the appointment of a new scheme administrator where there is an independent trustee.
Rules on the surrender of pensions are being changed from 20 March 2014 to close off a loophole used by pensions liberators. The surrender of benefits in favour of a dependant will only be authorised if the new benefits are to be provided in the same pension scheme and the surrender of benefit which creates a surplus payable to an employer will be treated as an unauthorised payment.
Full flexibility for DC retirement
The Government is consulting on the plans to remove restrictions on retirement from DC schemes from 2015. This will have a major impact on benefit design and investment in DC schemes as well as a knock-on effect on DB schemes due to the proposed restrictions on transfers. We will be considering these proposals in depth over the next days and weeks and will be issuing further comment and guidance.