PENSIONS – PENSION REFORM 2014/15
Synopsis: This Bulletin considers the rules relating to “small pots” commutation both now and beyond the pensions flexibility changes that are due to take place on 6 April 2015.
Date posted: Thursday, August 28, 2014
HMRC’s draft guidance relating to the changes in respect of the taxation of pensions from 6 April 2015 can be found here. This bulletin will consider the changes relating to commutation and also the so called ‘small pots’ lump sums.
When looking at this Bulletin, it is worth referring to the following:
• Bulletin which looks at planning opportunities with ‘small pots’ for those with issues with the lifetime allowance
• Bulletin which considers the transitional rules up until 5 April 2015.
• The Library Document relating to different commutation rules, specifically sections 5 and 6
The Current Position
The ‘small pots’ rules in respect of a scheme that is not an occupational or public service pension scheme, as amended by Finance Act 2014 are:
• the payment is made on or after 6 April 2012, and
• the payment is made to a member who has reached the age of 60, and
• the ‘small pot’ does not exceed £10,000, and
• the payment extinguishes the member’s entitlement to benefits under the arrangement, and
• the member has not previously received more than two such payments in respect of Regulation 11A, i.e. a scheme that is not an occupational or public service pension scheme.
These rules are set out in Regulation 11A of The Registered Pension Schemes (Authorised Payments) Regulations (SI 2009/1171).
It is worth pointing out that, when considering the number of previous ‘small pots’ the member has had, the total of three applies only to schemes that are neither an occupational or public service pension scheme, in other words they only count personal pensions including SIPPS and Stakeholders.
It is Regulation 11 of SI 2009/1171 that covers and here the conditions are:
(a) the member has reached the age of 60.
(b) the member:
a. is not a controlling director of a sponsoring employer of this or of any related scheme, and
b. is not a person connected to such a person;
(c) the payment does not exceed £10,000;
(d) the commutation value of the benefits to which the member is entitled under this and any related scheme does not exceed £10,000 in total;
(e) the payment extinguishes the member’s entitlement to benefits under this scheme; and
(f) no recognised transfer was made out of this or any related scheme in respect of the member during the 3 years preceding the date of the payment.
There are a number of important differences worth noting between Regulation 11 and 11A:
• It is only for personal pension schemes that there is a requirement to consider how many previous PPPs have utilised the ‘small pots’ commutation. There is no such check where the scheme concerned is an occupational pension scheme. So, if an individual has several small occupational pension schemes each below the £10,000 threshold they can be commuted in addition to up to three personal pension schemes.
• When looking at personal pension schemes, it is the arrangement that is looked at, whereas for occupational pension schemes it is the members total rights in the scheme that counts towards the £10,000 threshold.
• Transfers out need to be considered in respect of occupational pension schemes if they took place within the previous three years. However when looking at PPPs it is possible to transfer out or merge arrangements so that an arrangement can be created that is within the £10,000 threshold.
Similar rules apply to larger pension schemes, these are set out in Regulation 12 of SI 2009/1171
Changes Due on 6 April 2015
The changes proposed in the Taxation of Pensions Bill 2014 are:
• These rules will continue to apply to DC schemes beyond 6 April 2015.
• The minimum age to taking ‘small pots’ will reduce from age 60 to the normal minimum pension age, currently age 55.
As already set out in Bulletin, the main advantages of the ‘small pots’ commutation is that it doesn’t count towards a member’s lifetime allowance. Also from 6 April 2015, it would appear that where an individual crystallises rights under the ‘small pots’ rules, it doesn’t trigger the money purchase annual allowance rules, i.e. the reduced £10,000 annual allowance in respect of future DC contributions.
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