Budget Update – November 2014

In our last Budget Update we summarised the results of the Government’s consultation on changes to the way members of defined contribution (DC) schemes can take their retirement benefits. Given the importance of these changes we think it is a good idea to keep our members up-to-date with developments, even if the changes don’t affect the Scheme.

Effect on the Prudential Staff Pension Scheme members

As we have noted previously, pension arrangements do not have to automatically adopt all of the changes that are likely to come into effect from April 2015 (see below). The Trustee of the Prudential Staff Pension Scheme will be reviewing the Scheme’s position with the Company and its advisers and we will be in touch in due course with more detail about the changes that affect Scheme members.

The “Taxation of Pensions” Bill

The Taxation of Pensions Bill was published on 14th October 2014 and will soon go through Parliament. The Bill will put in place the flexibilities announced in the Budget and clarifies the treatment of tax-free lump sums for people with DC pension savings, by introducing two new types of authorised payments.

New Authorised Payments

From 6 April 2015, there will be two new authorised payments available for those aged 55 or over with DC pension savings. Not all DC schemes will necessarily offer these payments.

1/ Flexi-access drawdown fund

You may have already heard of the phrase “drawdown”. Drawdown is when, instead of buying an annuity when you retire, you take money out of your pension savings as you need it. Previously there were limits to how much and how often you could take money out of a drawdown fund. However, from April 2015, there will be no restriction to how much or how frequently you can withdraw, although schemes that adopt this type of payment are likely to set limits.

So, in this case, a member can take up to 25% of their DC pension savings as a tax-free lump sum then allocate the remainder to a flexi-access drawdown fund instead of buying an annuity. When the individual draws from this fund the payment will be taxed as pension.

2/ Uncrystallised funds pension lump sum

This is a new type of payment that will be introduced from April 2015. The purpose of this payment is to remove the requirement for an individual to allocate their pension savings to a drawdown fund or an annuity.

Instead of taking a tax-free lump sum when you retire, you can draw as many individual lump sums from your fund as you like. A quarter of each lump sum will be tax-free and the remainder will be taxed as a pension.

Changes to the Annual Allowance

One issue that the Government is trying to address is “recycling” of these payments to gain a tax advantage. An individual can currently make annual DC contributions of £40,000 tax free. In theory, an individual could take pension using either of the above methods and put that money into a new DC pension to avoid paying any tax on the payment. They could then take a tax-free payment from this new DC pension at a later date.

To avoid this, the first of either of the payments described above will trigger a reduction in the annual allowance to £10,000 for future DC pension savings and £30,000 for non-DC pension savings. It won’t be possible to carry forward previously unused DC annual allowance.