Taxation of Pensions Bill – Government legislates to replace the “death tax”
In the run up to Committee stage the Government tabled amendments to the Taxation of Pensions Bill to legislate for the changes to the tax charge which applies to defined contribution (DC) pension funds passed on at death (both those that have been designated but not drawn and those yet to be crystallised). This appears to implement most of the changes announced by the Chancellor at the end of September (see Pensions Bulletin 2014/40).
The policy intent from 6 April 2015 is that persons other than “dependants” can also inherit a member’s unused funds at death, whether those funds are paid out as a lump sum or set up as further drawdown. In this respect the applicable tax charges are changing so that:
- Where a member dies before age 75, all lump sums and flexi-access drawdown pensions from unused drawdown funds are payable tax free, subject to Lifetime Allowance testing (matching the position at the moment only for lump sums paid out of uncrystallised DC funds)
- Where the member dies after age 75, as now, flexi-access drawdown will be subject to income tax in the hands of the recipients – but this will also become true for lump sums (rather than the 55% charge currently payable) with an interim stage that payments made in 2015/16 will be subject to a 45% charge (until the government “has engaged with pension industry”)
The centrepiece of the amendments is a new Schedule that tops up the changes already in the Bill so as to:
- Set out the rules to be able to inherit and access unused DC funds
- Adjust the tax charges
- As hinted at in the initial announcement, introduce a new “5C” benefit crystallisation event (tested against the member’s remaining Lifetime Allowance), following the death of the member before age 75 with uncrystallised DC funds. This operates to the extent that such funds are designated to dependants’ or nominees’ drawdown (which does mean that, for some, an option that currently would result just in income tax could now result in LTA charges)
Of greatest interest is who will be able to inherit through this new facility. The Schedule talks about “nominees” and “successors” as follows:
- A “nominee of a member” means an individual nominated by the member (or nominated by the scheme administrator but only in the absence of any dependant of the member or member nomination)
- A “successor of a member” means an individual nominated by a dependant, nominee or successor of the member (in relation to their own death), or nominated by the scheme administrator but only where the beneficiary has not made a nomination
This is in contrast to the current position where the opportunity to set up drawdown funds from inherited pension assets is on the member’s death and just to the member’s “dependants” – ie the spouse or civil partner of the member, a child under age 23, or a person who was financially dependent, mutually financial dependent or otherwise reliant on the member due to physical or mental impairment.
As a successor can nominate a further successor, it would seem that the inherited DC fund can be passed down the generations (or indeed more widely).
And finally, broadly, funds on death must either be paid out as a lump sum or else designated as one of the dependant, nominee or successor drawdowns within two years starting with the earlier of the member’s death or when the scheme administrator could reasonably have known of the death.
For our analysis of what the Bill contained before these amendments see Pensions Bulletin 2014/43. To complete the legislative jigsaw that will give effect to the planned flexibilities announced in the March Budget we still need the missing pieces of the Pension Schemes Bill (see article further below).
Comment
There is a lot of detail to work through in this new Schedule (as there is in the rest of the Bill) but the intentions seem clear. (Inheritance tax sits outside this legislation – we understand that there is intended to be no change in the fact that most payouts from pension funds are not subject to inheritance tax.) As such the measures should open up the way to enabling pension wealth to be passed down the generations in a very tax efficient manner. But how long such a mechanism can survive will depend on the future political climate.
DWP publishes guidance on “Bridge” regulations
The Department for Work and Pensions has published a document which explains what each regulation in the complex “Bridge” transitional regulations is intended to do.
These regulations were a necessary part of the narrowing of the definition of “money purchase benefits” provided for by the Pensions Act 2011 which came into force on 24 July 2014 but was backdated to 1 January 1997 (see Pensions Bulletin 2014/31).
After some introductory remarks, Money purchase benefits in pensions law: guidance on recent changes to legislation takes the reader through each area of the regulations in turn.
Comment
The re-definition of money purchase benefits will not substantially affect most pension schemes most of the time. However, a process needs to be gone through to establish this. LCP has a toolkit to help schemes through this compliance process. Do please get in touch with your usual LCP contact if you need help with this.
Pension Schemes Bill – a progress update
The Pension Schemes Bill completed Committee stage on 4 November and there is now a new version of the Bill available incorporating the significant additions and re-arrangements made as part of this stage in the parliamentary process.
More meat has been put on the collective benefits bone and the Bill itself is now in a more coherent order. What remain missing are all the changes to DWP law in order to ensure that the new DC flexibilities being legislated for in the Taxation of Pensions Bill do not get snagged. Right now the only addition to the Bill in this area has been in relation to pension guidance (the “guidance guarantee”).
Report stage is next, the timing for which is not yet known. Presumably we will see the necessary further amendments around this time. If not, they will need to be introduced during the Bill’s passage through the House of Lords.
DWP updates general state pension guidance
The Department for Work and Pensions (DWP) has published new versions of a number of its guidance leaflets for the general public, updated to take account of the relevant benefit rates from April 2014. These include:
- State Pensions: Your Guide – which provides information on the existing state pension for people reaching state pension age before 6 April 2016, and warns both of the changes to state pensions from April 2016 and to the state pension age from December 2018
- Deferring your State Pensions – which contains information about deferring state pension for people reaching state pension age before 6 April 2016, and again warns of the state pension changes from April 2016
- Pension Credit: Do I qualify and how much could I get? – which now warns that as part of the state pension reforms, the savings credit element of the pension credit will not be available for those reaching state pension age on or after 6 April 2016. This will include those with a partner who reached state pension age before 6 April 2016. However, some protection will be given to couples who were receiving savings credit before 6 April 2016
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
