You would have had to spend the month of April under a stone to have escaped the press coverage of the new pension freedoms. If you’re not aged 55 or post-55, but a member of a unfunded public sector final salary scheme, you are probably a bit miffed that you can’t take advantage of these choices. Of course, as an employer - and specifically a payroll professional - you will almost certainly be expected to be an expert on the impact
This article provides a few pointers on what you might get asked by those lucky folk that are the right age, in the right type of pension scheme and whose provider has ‘stepped up to the plate’ and can provide products that can utilise the freedoms now.
What can we do from 6 April 2015?
The Taxation of Pensions Act 2014 allows for defined contribution (DC) (money purchase) pension scheme members to have two new choices in respect of taking non-fixed income from their pension fund:
• A flexi-access drawdown
• An uncrystallised pension fund lump sum (UPFLS)
The former used to exist prior to April 2015, but only for wealthier pensioners who had sufficient other income to live on outside of the pension fund in question, but now the law provides this as an option to all. The flexiaccess option allows the individual to take 25 per cent of the fund as a tax-free lump sum, as has always been the case, but then to withdraw amounts from the fund as and when they see fit, each withdrawal being classed as taxable income for that year.
In an uncrystallised pension fund lump sum (UPFLS), you don’t take 25 per cent up front, but each withdrawal is treated as 25 per cent tax-free and 75 per cent taxed. Most of us call them flumps as it’s easier to say and reminds us of those retro marshmallow sweets of our youth - remember we are talking about the post-55s before you ask ‘what is a Flump?’
So why, you might ask, wouldn’t I want to take my 25 per cent tax-free up front? Because as the fund is uncrystallised, when I don’t take the whole 25 per cent tax free up front I can leave any of the fund I haven’t squandered to my dependants when I die. Of course many people will still decide that fixed income provides the security they need and will take a scheme pension or turn the fund into an annuity having taken 25 per cent tax-free.
Finally, up to three ‘small pots’ of up to £10,000 can also be turned immediately into cash and treated as taxable income for the year and there will be more and more of these because of auto-enrolment (potentially 50 million by 2050).
Isn’t there a tax planning opportunity here?
So why don’t I, if I have the opportunity to, sacrifice all my salary into a pension and pay no tax up to the annual allowance of £40,000 and then withdraw amounts from my fund that keep me within the 20 per cent tax bracket?
Because for the rest of the pension input year that falls after the first flexi-access or ‘flump’, the annual allowance for any DC pension schemes you are a member of falls to £10,000 for that year, rather than £40,000.
But how does HMRC know I’ve taken a flump or flexiaccess?
Either because you’ve been a good taxpayer and told your pension schemes that you have done so having received a certificate to tell you the impact from the pension scheme that you made the withdrawal from, or HMRC find out from the pension provider’s full payment submission (FPS). This is because a new data item has been inserted into the FPS for pension payrolls from April 2015, ‘flexibly accessing pension rights’, which is inserted when an RTI reported payment is in relation to a flump or flex.
What else might I be asked as an employer?
The main surprise for those who flex or flump is going to be the tax treatment of the withdrawal. If an individual doesn’t have taxable income exceeding £10,600 they might expect that the provider will know that the withdrawal is tax free. In the absence of a P45, however, the provider will not and will operate emergency tax on the withdrawal.
HMRC’s Pension Schemes Services Newsletter in April 2015 outlines some useful scenarios. Responding to concerns that affected individuals would have to wait until tax year end to get a tax refund, HMRC introduced some new forms in April 2015 to facilitate speedier refunds.
Individual members should only use the P50Z form if:
• They have taken a pension flexibility payment that uses up all their pension pot and they have no other income.
Individuals should only use the P53Z form if: • They have taken a pension flexibility payment that uses up all their pension pot and they do have other taxable income in this tax year.
Individuals should only use the P55 form if: • They have taken a pension flexibility payment that does not use up all of that fund.
• They have only taken one payment and do not intend to take a further payment from the same pension scheme this tax year.
• The pension provider is unable to make any tax refund.
What else should I be worrying about?
The pension freedoms provide a ‘scammers’ paradise’. Brace yourself for cold calls telling you that even though you are 29 you can transfer your cash ‘to our pension scheme’ and get at it now. You can’t. There is no loophole and such transfers and withdrawals would lead to HMRC slapping on a 55 per cent tax charge on the transfer, plus the scheme will take an ‘admin fee’ of thousands of pounds so wiping out the fund in its entirety for many folk.
This has been going on for several years anyway (it’s known as Pension Liberation Fraud), but April’s freedoms offer scammers another opportunity to fleece the vulnerable and ill-informed. To try to stop people falling into this trap, the government have insisted that transfers from final salary to money purchase schemes must meet the following criteria:
• The pension is not yet in payment
• The individual has taken advice from a regulated impartial financial adviser* (only in relation to those with pension funds of £30,000 or more)
• Trustees use their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
*A new tax exemption was announced at Budget 2015 if employers pay for this advice on behalf of employees.
Will it be a game changer?
Almost certainly, but not immediately given that a lot of pension providers are not ready to offer the products needed to take advantage of the freedoms as they have only had a year to get ready. In future, though the old mantra of ‘DB good, DC bad’ is changing. It may well also influence behaviour in respect of workplace pensions with individuals keen to stay in schemes and pay in more (particularly if the employer matches) if they know this can be accessed at the age of 55 plus.
By Kate Upcraft
You would have had to spend the month of April under a stone to have escaped the press coverage of the new pension freedoms. If you’re not aged 55 or post-55, but a member of a unfunded public sector final salary scheme, you are probably a bit miffed that you can’t take advantage of these choices. Of course, as an employer - and specifically a payroll professional - you will almost certainly be expected to be an expert on the impact
This article provides a few pointers on what you might get asked by those lucky folk that are the right age, in the right type of pension scheme and whose provider has ‘stepped up to the plate’ and can provide products that can utilise the freedoms now.
What can we do from 6 April 2015?
The Taxation of Pensions Act 2014 allows for defined contribution (DC) (money purchase) pension scheme members to have two new choices in respect of taking non-fixed income from their pension fund:
• A flexi-access drawdown
• An uncrystallised pension fund lump sum (UPFLS)
The former used to exist prior to April 2015, but only for wealthier pensioners who had sufficient other income to live on outside of the pension fund in question, but now the law provides this as an option to all. The flexiaccess option allows the individual to take 25 per cent of the fund as a tax-free lump sum, as has always been the case, but then to withdraw amounts from the fund as and when they see fit, each withdrawal being classed as taxable income for that year.
In an uncrystallised pension fund lump sum (UPFLS), you don’t take 25 per cent up front, but each withdrawal is treated as 25 per cent tax-free and 75 per cent taxed. Most of us call them flumps as it’s easier to say and reminds us of those retro marshmallow sweets of our youth - remember we are talking about the post-55s before you ask ‘what is a Flump?’
So why, you might ask, wouldn’t I want to take my 25 per cent tax-free up front? Because as the fund is uncrystallised, when I don’t take the whole 25 per cent tax free up front I can leave any of the fund I haven’t squandered to my dependants when I die. Of course many people will still decide that fixed income provides the security they need and will take a scheme pension or turn the fund into an annuity having taken 25 per cent tax-free.
Finally, up to three ‘small pots’ of up to £10,000 can also be turned immediately into cash and treated as taxable income for the year and there will be more and more of these because of auto-enrolment (potentially 50 million by 2050).
Isn’t there a tax planning opportunity here?
So why don’t I, if I have the opportunity to, sacrifice all my salary into a pension and pay no tax up to the annual allowance of £40,000 and then withdraw amounts from my fund that keep me within the 20 per cent tax bracket?
Because for the rest of the pension input year that falls after the first flexi-access or ‘flump’, the annual allowance for any DC pension schemes you are a member of falls to £10,000 for that year, rather than £40,000.
But how does HMRC know I’ve taken a flump or flexiaccess?
Either because you’ve been a good taxpayer and told your pension schemes that you have done so having received a certificate to tell you the impact from the pension scheme that you made the withdrawal from, or HMRC find out from the pension provider’s full payment submission (FPS). This is because a new data item has been inserted into the FPS for pension payrolls from April 2015, ‘flexibly accessing pension rights’, which is inserted when an RTI reported payment is in relation to a flump or flex.
What else might I be asked as an employer?
The main surprise for those who flex or flump is going to be the tax treatment of the withdrawal. If an individual doesn’t have taxable income exceeding £10,600 they might expect that the provider will know that the withdrawal is tax free. In the absence of a P45, however, the provider will not and will operate emergency tax on the withdrawal.
HMRC’s Pension Schemes Services Newsletter in April 2015 outlines some useful scenarios. Responding to concerns that affected individuals would have to wait until tax year end to get a tax refund, HMRC introduced some new forms in April 2015 to facilitate speedier refunds.
Individual members should only use the P50Z form if:
• They have taken a pension flexibility payment that uses up all their pension pot and they have no other income.
Individuals should only use the P53Z form if: • They have taken a pension flexibility payment that uses up all their pension pot and they do have other taxable income in this tax year.
Individuals should only use the P55 form if: • They have taken a pension flexibility payment that does not use up all of that fund.
• They have only taken one payment and do not intend to take a further payment from the same pension scheme this tax year.
• The pension provider is unable to make any tax refund.
What else should I be worrying about?
The pension freedoms provide a ‘scammers’ paradise’. Brace yourself for cold calls telling you that even though you are 29 you can transfer your cash ‘to our pension scheme’ and get at it now. You can’t. There is no loophole and such transfers and withdrawals would lead to HMRC slapping on a 55 per cent tax charge on the transfer, plus the scheme will take an ‘admin fee’ of thousands of pounds so wiping out the fund in its entirety for many folk.
This has been going on for several years anyway (it’s known as Pension Liberation Fraud), but April’s freedoms offer scammers another opportunity to fleece the vulnerable and ill-informed. To try to stop people falling into this trap, the government have insisted that transfers from final salary to money purchase schemes must meet the following criteria:
• The pension is not yet in payment
• The individual has taken advice from a regulated impartial financial adviser* (only in relation to those with pension funds of £30,000 or more)
• Trustees use their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
*A new tax exemption was announced at Budget 2015 if employers pay for this advice on behalf of employees.
Will it be a game changer?
Almost certainly, but not immediately given that a lot of pension providers are not ready to offer the products needed to take advantage of the freedoms as they have only had a year to get ready. In future, though the old mantra of ‘DB good, DC bad’ is changing. It may well also influence behaviour in respect of workplace pensions with individuals keen to stay in schemes and pay in more (particularly if the employer matches) if they know this can be accessed at the age of 55 plus.
By Kate Upcraft
