In the first of two articles, we took a look at the new interim pension income rules and how they apply to Capped Drawdown. Here we take a look at how they apply to Flexible Drawdown.
With effect from 27th March 2014, the minimum income requirement for flexible drawdown reduced to £12,000 per year from £20,000 per annum. This applies to new Flexible Drawdown arrangements commencing on or after 27th March 2014. This reduction also applies to Dependant’s Flexible Drawdown. As previously, prior to an individual / dependant entering into Flexible Drawdown, a declaration confirming all relevant conditions have been satisfied will still have to be made. These are: –
No contributions, whether from the member, an employer or a third party, may be made into money purchase schemes during the tax year that Flexible Drawdown commences. Therefore, an individual intending to enter Flexible Drawdown during the tax year 2014 / 2015 must cease making or receiving contributions from any source into money purchase arrangements by 5th April 2014 at the latest.
- Active membership of any defined benefit or cash balance schemes must have ceased. This has to apply by the date the declaration is made, therefore, this could be arranged during the 2014/2015 tax year.
- The individual must have existing secure pension income of at least £12,000 (reduced from £20,000) for the tax year that flexible drawdown starts. All sources of pension income used to satisfy this requirement must be in payment at the point that the member completes the declaration. It’s the actual amount of pension income received during the tax year that counts. For example, if an individual begins to receive a scheme pension of £24,000 per annum, payable monthly from 1st December 2014, they will receive £10,000 in the 2014/2015 tax year, which does not satisfy the minimum income requirement.
What pension income counts towards the minimum income requirement?
These are as follows: –
- state pension and social security pensions; and the equivalent from any non-UK countries.
- lifetime annuity or dependant’s annuity from a registered pension scheme – for a With Profits or Unit Linked lifetime or dependant’s annuity, only the intrinsic minimum guaranteed amount is taken into account.
- scheme pension or dependant’s scheme pension paid as an annuity.
- scheme pension or dependant’s scheme pension paid from the scheme, provided the scheme is paying a scheme pension to at least 20 members.
- the equivalent of any of the above sources of pension income paid from an overseas pension scheme.
- periodic compensation paid by the Pension Protection Fund (PPF).
- certain payments from the Financial Assistance Scheme (FAS) or because the pension is about to enter the FAS.
What pension income does not count towards the minimum income requirement?
These are as follows: –
- drawdown pension or dependant’s drawdown.
- fixed term annuities or fixed term dependant’s annuities.
- a scheme pension from any defined benefits scheme with fewer than 20 members.
Once an individual enters into Flexible Drawdown, any contributions to a money purchase scheme in a future tax year will be subject to the Annual Allowance charge. This also applies to any new accrual in a defined benefits scheme in a future tax year.
Who’s likely to take advantage of the reduced minimum income requirement?
Commencing Flexible Drawdown in 2014/2015 is likely to be unattractive for anyone having to annuitise to secure the minimum income requirement. They will probably wish to defer until April 2015 to take advantage of the Budget proposals giving them fully flexible access to uncrystallised funds with no minimum income requirement.
Flexible drawdown could still be suitable for those individuals that already have £12,000 per annum of secure pension income for 2014/2015. Provided they have sufficient Lifetime Allowance, they’ll be able to take 25% tax free cash from any funds they designate for flexible drawdown. They can draw down the balance of the designated funds flexibly. They can take the full amount in cash if they wish, subject to any provider restrictions. However, any additional funds they draw down will be taxed at their own marginal rate of Income Tax.
Those that are currently using Capped Drawdown that have a secure income of at least £12,000 per annum could consider switching to Flexible Drawdown. This may, however, involve a change of providers.
In isolation, the increase to the Capped Drawdown income limit to 150% of GAD and the reduction in the minimum income requirement for Flexible Drawdown from £20,000 per annum to £12,000 per annum are clearly welcome in offering greater flexibility to individuals reaching the point of taking retirement benefits. However, as interim measures, they undoubtedly add further complexity to those considering taking pension benefits, and should be carefully considered, particularly in the context of the significantly more radical changes proposed for April 2015.
As and when we begin to receive information about these rules, we will surely pass these on to our clients.