Individuals will benefit from changes to withdrawals from registered pension schemes. Saving was a theme of this Budget and the reform of pensions was a headline measure.
A number of changes are being made affecting individuals and the benefits that can be taken from registered pension schemes, covering the following:
Capped drawdown
There is currently a limit on the amount of drawdown pension that the pensioner may withdraw during a drawdown pension year. The current limit is 120% of a value called the ‘basis amount’. A drawdown pension year is the period of 12 months starting on the anniversary of when the individual first became entitled to the drawdown pension. This basis amount is also commonly referred to as the amount of an ‘equivalent annuity’.
The Budget increases the maximum income that a drawdown pensioner (member or dependant) with a capped drawdown pension fund can choose to receive to 150% of the ‘basis amount’ and applies for all drawdown pension years starting on or after 27 March 2014.
Flexible drawdown
This allows individuals, where they meet certain conditions, to withdraw from their pension savings. There is no limit on the amount that they can take each year as drawdown pension. One of the required conditions is that the individual is receiving relevant income of £20,000 or more.
The Budget reduces the minimum income threshold for flexible drawdown to £12,000 and applies to all individuals who apply for flexible access to their drawdown pension on or after 27 March 2014.
Trivial commutation
A trivial commutation lump sum can be paid when the member is 60 or over and the total value of their pension rights under all registered pension schemes is less than the commutation limit; the lump sum extinguishes all the rights the member has under the scheme. The current commutation limit is £18,000.
The Budget allows members over 60 with total pension savings of £30,000 or under to take out all savings as one or more trivial commutation lump sums. The rise in the limit applies to all commutation periods starting on or after 27 March 2014.
Small pots
Currently, a lump sum up to £18,000 can be paid where, due to the fact that the lump sum would not extinguish all rights under the scheme because of an annuity in payment, it could have been paid as a trivial commutation lump sum.
A lump sum can currently be paid only where the pension scheme is neither an occupational pension scheme nor a public sector pension, and where the member has not previously received more than one lump sum under this regulation.
Currently, members with transitionally protected rights to receive a tax-free pension commencement lump sum worth more than 25% of their total rights, who exercise that right, may also receive the balance of their fund to be paid as a taxed lump sum if it is worth £2,000 or less.
The Budget increased the limit of £18,000 referred to above to £30,000, and the £2,000 limit referred to above to £10,000. Also, the number of pension pots of below £10,000 that can be taken as a lump sum is increased from two to three.
The rise in the amount that can be taken as a taxed lump sum from other small pension pots, and the number that can be taken, applies to all payments made on or after 27 March 2014.
Lump sum withdrawals
When a member of a pension scheme starts to draw benefits from that scheme they can currently take up to 25% of the value tax free; this has not changed.
Currently, people who choose to withdraw all of their defined contribution pension savings at the point of retirement are charged 55% on the amount withdrawn (other than the 25% tax-free amount).
From April 2015 an individual will be able to withdraw their savings at a time of their choosing subject to their marginal rate of income tax, which for a basic-rate taxpayer will be 20%.