Currently, benefits from a registered pension scheme can be taken as a mixture of a lump sum and an annuity which provides for annual income. These benefits are subject to a number of limitations, in particular in relation to:
- the amount that can be drawn as income where an annuity has not been taken (‘drawdown’); and
- lump sums that can be taken from smaller schemes.
The drawdown is currently capped at 120% of an amount commonly known as an ‘equivalent annuity’ (‘capped drawdown’). No limit applies where a minimum income threshold of £20,000 has been met (‘flexible drawdown’).
In certain circumstances those aged 60 or over can draw the full benefits from their pension schemes as a lump sum where the total rights are less than £18,000 across all pension schemes in their name (‘trivial commutation’). This includes where not all pension rights are extinguished because an annuity is in place. For rights that have already crystallised, a revaluation factor is applied to determine how much of the limit has already been used.
In addition to the trivial commutation limit, those aged 60 or over can take the full benefits of ‘stranded’ employer schemes as a lump sum where the value of the rights is less than £2,000 (‘small pots’). This is limited to one lump sum per person.
The limits will be amended as follows:
- the capped drawdown percentage will increase to 150%;
- the minimum income threshold for flexible drawdown will decrease to £12,000;
- the trivial commutation limit will increase to £30,000, while the requirement for a revaluation factor will be removed; and
- the small pots limit will increase to £10,000 while the maximum number of such lump sums will increase to three.
Interesting, all of the above changes will take effect from 27 March 2014.
Further changes are proposed from April 2015 to simplify defined contribution pension savings and offer complete flexibility over taking benefits irrespective of total pension savings. The proposal envisages that drawings other than the tax free lump sum may be taxed as income and subject to marginal tax rates rather than the 55% charge that currently applies for full withdrawals.
These changes will affect members of registered pension schemes by giving them more flexibility in how they draw their pension benefits. Although the proposed future changes offer the chance of greater flexibility in the future, the most significant change at this stage is the reduction of the minimum income threshold for flexible drawdown.