Pension Practitioner
The SSAS Experts
21
OCT
2014

New Pension Reforms

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Hello Folks,

We have held back over the summer months publishing our newsletter as a series of consultations changes took place regarding the inequity of the tax charge on death benefits.

We are pleased that this has been now clarified and can confirm the changes that will apply to your pension scheme, in particular the rules regarding pension income amounts and also the tax charge that would otherwise be paid on death during retirement where a lump sum is paid to your beneficiaries.

What are the new changes? 

On 29 September 2014, HM Treasury announced changes to the tax treatment of the current 55% special lump-sum death benefits charge that applies when certain lump-sum death benefits are paid from your pension scheme.

Reduction in tax charge on death.

Prior to 5 April 2006, HMRC allowed only an income to be paid to spouse’s and beneficiaries on death in retirement.

The ability to pay death benefits as a lump sum at the individuals marginal rate of income tax was vigorously argued by firms such as us, but ultimately fell on deaf ears. 8 years latter and what a difference we now find ourselves in.

What rate will I be now charged under the new rule changes?  

From next April (2015) certain lump sum death benefits will be payable tax-free where the individual dies before age 75 as well as taxed at 45% or the individual’s marginal rate from the 2016/17 tax year.

If the individual dies aged 75 or older, The new regime will apply when the payment is made, not when the death occurs.

Current System

 

 

Crystallised

Uncrystallised

Below Age 75

55% charge if paid as lump sum or dependant can draw down at marginal rate

Can pass on as a lump sum completely tax free to any beneficiary up to the deceased’s lifetime allowance

Above Age 75

55% charge if paid as lump sumor dependant can draw down atmarginal rate

55% charge if paid as lumpsum or dependant can drawdown at marginal rate

 

New system

 

 

Crystallised

Uncrystallised

Below Age 75

Can pass on completely taxfree to any beneficiary as alump sum or as a drawdownpension

Can pass on completely taxfree as a lump sum to anybeneficiary (up to the lifetimeallowance)

Above Age 75

Any beneficiary can drawdown on it at their marginalrate or 45% charge if paid as alump sum (marginal rate from2016-17)

Any beneficiary can draw down on it at their marginal rate or45% charge if paid as a lumpsum (marginal rate from 2016-17)

 

What does this all mean?

Under the new system, the 55% tax rate will no longer exist. Anyone who dies below age 75 who hasn’t yet started their pension, or is taking a drawdown.

New Investment Rules 

HMRC has been granted additional powers in respect of the ability to deregister a pension scheme where the investments held are inconsistent with the objectives to provide a good outcome in retirement.

PPs New Operation Function. 

Pension Practitioner historically did not intervene on a client’s investment choice, but for new schemes we act as the registered administrator of the pension scheme. As such, this ensures that the scheme provides for a professional administrator able to take on the liability required by HMRC and in addition will ensure that investments selected by clients are consistent with the requirements set out by HMRC.

How much income can I now take in retirement under the new rules?

Flexible drawdown allows people to take any amount from their pension, provided that they have a minimum lifetime income of £20,000 p.a.

This has now been reduced to £12,000 pa and under the new rules, provided that you have such an amount as a lifetime income there is no upper limit regarding what you can take from your SSAS.

Lifetime income will be pensions in payment, such as state pensions, annuities, and lifetime bonds.

If you do not have a lifetime income of £12,000 pa, however your pension pot/s from all sources does not exceed £30,000 then you can take all of your money in one lump sum.

The first 25% will be paid free of income tax.

A dash for cash but more tax…..

With the introduction of the latest pension reforms, pensions are set to become like bank accounts. Once you are over 55, the proposal will be that the the £12,000 lifetime income will fall by the wayside and you simply take as much or as little as you want from your pension scheme, with the continued option of being able to pay in and obtain a tax credit of at least 20p in the £ for contributions up to £3600 irrespective of income. This announcement coincides with the

Taxation of Pensions Bill being read in Parliament this month.

 

 

 

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