Changes to Pensions Following the 2016 Budget
Written by Sam Barrie on March 21, 2016.
Last week UK Chancellor George Osbourne delivered his budget 2016 speech. So after much speculation, what has remained the same for UK pensions and what changes have been made?
A new flat rate state pension of £155.65 per week for those reaching state pension age after 6th April this year. This is based on 35 qualifying National Insurance years contributions.
At present, you are entitled to tax relief on contributions of £40,000 per annum (by both employee and employer). You can also ‘carry forward’ unused allowances over the past 3 tax years allowing you to make a larger total pension input without necessarily being liable to tax. There have been no changes to these levels in this year’s budget, however the annual allowance will be tapered for anyone whose ‘adjusted income’ including the value of any employer pension savings, is above £150,000. Their annual allowance will be reduced by £1 for every £2 of adjusted income above the £150,000 mark with a maximum reduction of £30,000.
The Pension Commencement Lump Sum (PCLS) was also an area that some reports said would be reviewed but no announcements were forthcoming. For Defined Contribution (investment based, e.g. SIPPS) schemes, you are still entitled to a 25% tax free lump sum before then drawing down. Defined Benefit (final salary) schemes will often still provide a PCLS but the percentage will vary depending on the occupational scheme.
The Lifetime Allowance (LTA) will be further reduced to a flat £1M from 6th April this year. The graph below shows how the LTA has changed over the past 10 years and is clearly one of the areas that the government is targeting for tax revenue. Those breaching the current LTA should certainly seek advice from a professional adviser.
Following the introduction of pension flexibility in April 2015, a number of minor changes are being made which apply to Defined Contribution schemes only:
Serious ill-health lump sums
Previously, it was only possible to take your whole pension as a lump sum if you were in serious ill-health prior to commencing drawdown. From April of this year, serious ill-health lump sums can be paid to individuals who meet the requirements and have already accessed benefits from their scheme. Those over the age of 75 will now also pay tax at their marginal rate rather than the previous flat rate of 45%.
Dependents drawdown and flexi-access drawdown
Dependents under the age of 23 in receipt of a dependents drawdown pension or flexi-access drawdown fund will be able to continue receiving authorised payments after their 23rd birthday. Prior to this, they would have to use up all of this fund by 23 or be subject to tax charges up to 70% for unauthorised payments thereafter.
Trivial Commutation Lump Sum
This can now be paid out of a Defined Contribution Scheme that is already in payment
Charity Lump Sum Death Benefit
A change will be made to align the tax treatment of a charity lump sum death benefit after a member has died under the age of 75 whether the pension scheme has been accessed or not (uncrystallised). The need to pay an uncrystallised funds lump sum death benefit, a drawdown pension fund lump sum death benefit or a flexi-access drawdown fund lump sum death benefit within two years when it is paid to a charity is also removed.
Where a member dies and the scheme must top-up the remaining funds to meet the entitlement of the member’s beneficiaries to an uncrystallised funds lump sum death benefit under the scheme rules, the full amount of the lump sum death benefit will be an authorised payment.
For a full review of your pension arrangements in the UK, please feel free to arrange a non-obligatory meeting: email@example.com