Pension Flexibility 2016

Changes operative from the day after Royal Assent to Finance Act 2016 will affect serious ill-health lump sums; dependants’ pensions; charity lump sum death benefits; trivial commutation lump sums; and lump sum death benefits from cash balance arrangements.

Currently, serious ill-health lump sums can only be paid out of funds that have not been accessed. This will no longer be so and provided the other conditions for serious ill-health lump sums are met, the remaining funds may be paid as a lump sum. In addition, a serious ill-health lump sum paid to an individual who has reached age 75 will be taxed at the individual’s marginal rate rather than at 45%.

Dependants will be able to continue to receive drawdown pension or flexi-access drawdown pension as authorised payments after reaching age 23. This aligns the tax treatment with that of a nominee of the member who has died.

The rules on making a charity lump sum death benefit on a death under the age of 75 out of uncrystallised funds and out of drawdown or flexi-access drawdown funds will be aligned. The need to pay such sums within two years will be removed.

It will be possible to pay a trivial commutation lump sum out of a money purchase scheme pension that is in payment.

Where funds must be topped up to meet the entitlement of a member’s beneficiaries to an uncrystallised funds lump sum death benefit under cash balance scheme rules, the full amount of the lump sum death benefit will be an authorised payment.

Reduction of Pensions Lifetime Allowance

The standard lifetime allowance is to be reduced from £1,250,000 to £1,000,000 for 2016/17 and 2017/18. For subsequent years it is to be the same as the preceding year, unless there is a rise in the consumer prices index, in which case it will be increased to reflect that rise (rounded up to the nearest £100).

As in previous reductions in the lifetime allowance, there are fixed and individual protections available to prevent retrospective effect. Applications may be made on or after 6 April 2016.

The opportunity is also taken to adjust provisions relating to pension commencement lump sums where there is protection for pre-April 2006 rights.

Pensions Tax: Bridging Pensions

The current legislation allowing the reduction of a scheme pension on receipt of the state pension (facilitating bridging pensions) will be repealed and replaced with regulations. The intention is to maintain the provision for bridging pensions on the introduction of the single-tier pension in April 2016.

Dependants’ Scheme Pensions

The anti-avoidance provisions that apply to ensure that a disproportionate amount of a member’s fund is not used to provide dependants’ pensions are to be amended for dependants scheme pensions payable on or after 6 April 2016 in order to reduce the compliance burden by reducing the number of comparison calculations required. This is to be achieved by introducing circumstances in which the limits to dependants’ provision do not apply.