George Osborne's 2014 budget reforms are now entering law. Coming into effect on 6 April 2015 are two key pieces of primary legislation which will be pivotal to the new flexibility of pensions.
The Taxation of Pensions Act 2014 was enacted on 17 December 2014. It will soon be joined on the statute books by the Pension Schemes Bill 2014-15, which has its third and final reading in the House of Lords today.
The Taxation of Pensions Act 2014
The Taxation of Pensions Act 2014 abolishes the requirement for individuals to access pension savings in a particular way (i.e. by having to purchase a lifetime annuity) and introduces the new tax regime that underpins flexible access to pension savings.
A member's ability to access their pension savings flexibly in a particular pension scheme will depend on the rules of the scheme and/or whether the statutory permissive override is used (see below).
Two key ways of accessing pension savings flexibly are given statutory footing in the Act: uncrystallised funds pension lump sums and flexi-access drawdown funds.
The Act also introduces the new £10,000 money purchase annual allowance (applicable if an individual accesses their pension savings flexibly), changes the tax treatment for pension savings at death and amends more minor technical provisions relating to capped drawdowns, trivial commutation lump sums and small lump sums.
Finally, the Act introduces a permissive override that will allow trustees and managers of registered pension schemes to make certain designated payments regardless of any provisions in the scheme's rules that would otherwise prevent such payments.
Pension Schemes Bill 2014-15
Amendments have been proposed to the Pension Schemes Bill 2014-15 to take account of recent policy developments.
The key changes are to:
- introduce a requirement for trustees to check that a member has taken independent advice from an appropriate person before converting any defined benefit (DB) benefits into flexible benefits or transferring them to a different scheme in order to acquire flexible benefits;
- give power by regulation to specify the circumstances in which an employer must arrange or pay for such independent advice from an appropriate person;
- introduce a ban on transfers out of unfunded DB public service schemes to schemes in which the member can obtain flexible benefits; and
- remove a restriction so that members have the right to take a cash equivalent transfer value (CETV) up to their scheme's normal pension age, rather than up to one year before they are due to reach their scheme's normal pension age.
If you would like to find out more about the reforms, please click on our Budget 2014 guide. This plain English guide explains the key reforms with graphics to help make sense of the changes.