The Treasury has issued its response to the Budget consultation on the pensions shake-up, clarifying changes that promise to offer much greater freedom to both providers and pension holders .
On 21 July the Treasury issued its response to the Budget consultation which ended on 11 June, providing further clarification on a range of potential changes.
A permissive statutory override will be introduced to ensure all defined contribution schemes are able to offer their members increased flexibility.
The government explained that the introduction of a statutory override mandating that schemes provide flexible payments would be disproportionate. However, some schemes may like to offer flexibility to their members, but would prefer not to amend their scheme rules because of the potential legal and administrative costs.
In these situations, the government would prefer the schemes were in a position to provide flexibility without having to amend their rules.
Having a permissive statutory override allows schemes to ignore their scheme rules and follow the tax rules instead, to pay out payments flexibly or to provide a drawdown facility.
Individuals will be able to transfer between defined contribution schemes up to the point of retirement if their scheme does not offer flexible access.
The government will make a number of changes to the tax rules to allow providers greater freedom to create new and innovative products that more closely meet consumers’ needs, including allowing annuities to decrease and allowing lump sums to be taken from annuities.
The government intends to change the current tax rules in order to:
■ Allow lifetime annuities to decrease;
■ Allow lump sums to be taken from lifetime annuities;
■ Remove the 10-year guarantee period for guaranteed annuities;
■ Allow payments from guaranteed annuities to beneficiaries as a lump sum, where they are under £30,000.
New tax rules will be put in place to ensure individuals do not use the new flexibilities —which are intended to provide people with greater access to their retirement savings — to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25 per cent tax-free.
Those who choose to draw down more than their tax-free lump sum from a defined contribution pension will be able to benefit from further tax-relieved pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 a year.
Those currently in ‘flexible drawdown’ have an annual allowance of £0 (they are unable to make further pension contributions under the current rules), but from April 2015 will be subject to a new annual allowance limit of £10,000.
Those who draw more than their tax-free lump sum from a defined contribution pension will still be able to benefit from further tax-relieved pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 a year.
This means that following their first flexible withdrawal, an individual will be able to contribute up to £10,000 a year with tax relief to a defined contribution pension.
