Legislation must catch up with ‘pension revolution’

Last week’s Budget introduced a major overhaul of pensions legislation. Sackers’ Zoe Lynch highlights the changes.

Certain changes are being introduced with effect from 27 March 2014 to give greater flexibility for both DB and DC members now ahead of more radical changes from April 2015. The 2015 changes to the rules on the use of members’ DC pots at retirement are proposed with the twin aims of simplifying the pensions tax regime and giving individuals more choice and flexibility.

The measures coming into force on 27 March 2014 include:

  • increasing the maximum amount that can be taken out each year from a capped drawdown arrangement from 120% to 150% of an equivalent annuity
  • reducing the minimum guaranteed income threshold for access to flexible drawdown from £20,000 to £12,000 
  • increasing the amount which can be taken as a lump sum under the general rules on “trivial commutation”, from £18,000 to £30,000
  • a five-fold increase in the size of a single small pension pot that can be taken as a lump sum at age 60, from £2,000 to £10,000
  • in addition, increasing the total number of small personal pension pots that can be taken as lump sums from two to three.

The new limits will apply from 27 March 2014 but legislation will need to catch up.  The proposed changes to legislation will be made as part of the Finance Act 2014 which is unlikely to receive Royal Assent until July 2014.  Until these Finance Act changes are made, the increased payments will, strictly speaking, be unauthorised payments.  However, HMRC has issued an announcement and is proceeding on the basis that these new limits are in force on and from 27 March 2014.

HMRC has introduced a change via a resolution made under the Provisional Collection of Taxes Act 1968 to allow it to collect (and trustees of registered pension schemes to account for) income tax on lump sums paid on or after 27 March 2014 based on the higher limits before the Finance Act 2014 is in force. This resolution was passed by Parliament on 25 March 2014.

There will therefore be a gap between the Finance Act changes coming into force and what the resolution says the trustees can pay and then account for via PAYE.  There may be other consequential legislative amendments required as well, for instance, in relation to contracting-out. 

The critical element in this four month gap will be to establish whether there are any barriers to paying benefits at the higher limits in the scheme rules and to ensure members are properly informed about the changes. 

  1. Check the scheme rules to see whether a higher amount can be paid under the scheme’s special terms and/or augmentation rules.
  2. Are there any restrictions in the scheme rules on paying unauthorised payments? Often the rules give the trustees discretion to do so, but not always.
  3. Are there any specific restrictions built into relevant rules? For example, a trivial commutation rule may require member consent (but this is not required under the Finance Act 2004).
  4. Do the scheme rules contain any discharges? Statutory discharges may not be available for this interim period.
  5. Whatever the trustees decide to do, it is essential that trustees communicate to members, especially those currently “in transit” to retirement and those nearing retirement. 

Based on the results of checking the scheme rules, some trustees may wish to implement the changes with effect from 27 March 2014 and rely on HMRC’s announcement and any appropriate discharges.  Others may wish only to implement the changes when the Finance Act 2014 is in force.

Zoe Lynch, partner, Sackers