Mark Canning, Head of Business Development at Yorsipp Ltd, takes a look at the forthcoming “pension flexibilities”:
The forthcoming “pension flexibilities” available from April 2015 are to be welcomed – giving savers the freedom to draw benefits at a time and pace to suit whilst also offering greater succession planning opportunities.
However, clients will also have to be aware of some potential unintended consequences of the new freedoms available. In addition, we have to wonder whether these changes are the catalyst for a wider benefit revolution to come?
Life Assurance implications
One issue that should be borne in mind is that pension provision can also act as a form of life assurance cover. For many people, this will often provide a significant lump sum benefit to their dependants upon death. When capital is being accessed via pension savings, perhaps at a more significant rate than previously possible, the “lost” life assurance should be borne in mind and ideally alternative cover considered.
Of course, the client may find it’s no longer possible to insure this lost cover at an acceptable premium due to age, state of health and or occupational reasons.
In addition, it should be remembered that whilst held within the pension wrapper, such benefits would fall outside the clients estate, whereas once they have been drawn this may increase exposure to Inheritance Tax.
Ability to make additional contributions
From April 2015, care will also be required as to the “format” of benefit taken between flexi access drawdown (“FAD”) and uncrystallised funds pension lump sums (UFPLS).
Under the former, normally up to 25% of the fund designated can be drawn tax free. If no income is taken from the residual drawdown fund then the member will retain the current annual allowance – i.e. the ability to make contributions of £40,000 per annum.
If however they draw any income from the fund, then their ability to contribute will be reduced to £10,000 per annum under the new Money Purchase Annual Allowance (MPAA) rules.
The latter option will also be available from April 2015. This allows ad hoc payments of lump sum benefits without the need to draw associated income. Again 25% of the fund can generally be drawn tax free with the balance taxed at the member’s marginal tax rate.
However all benefits drawn via UFPLS, will trigger the MPAA – and hence restrict contributions to £10,000 with any excess above this being subject to an annual allowance charge of 40% on any excess contribution made.
Wider benefit innovation….drawdown funded long term care?
At present, “immediate needs annuities” are not liable to income tax where the payment is made directly to the care provider for the life of the individual.
We would strongly welcome the ability for non-annuity pension income which is used to fund long term care provision to benefit from tax privileged treatment – and with the number of 80 year olds in the UK set to double to 6 million over the next 20 years, we believe this would be well received.
Mark has 25 years’ experience in financial services and his roles have included proposition design, technical consultancy, provider/investment research & trusteeship. Mark has a wealth of experience in the self-administered, workplace/individual pensions & “at retirement markets”. Over the years he has overseen some of the largest changes the industry has witnessed e.g. Pensions Simplification (Fidelity), Retail Distribution Review (Scottish Widows) and Auto Enrolment (Aegon). He also acted as Pensioneer Trustee both in a private capacity and for Scottish Mutual/Abbey – during which time he was responsible for c1,000 SSAS schemes. Mark has been involved with various technical and industry committees during his career. He is currently a member of both the full & technical Association of Member Directed Pension Schemes (AMPS) Committees and was previously part of the ABI Committee on RDR.