Since Chancellor George Osborne shocked the pensions industry with his radical Budget reform announcement there has been plenty of excitement and speculation about the changes, what they will mean and who will be the winners and losers. However, the consultation is still open and there has been no sign of any draft legislation or detailed rules surrounding the reforms.
Entry restrictions and recycling?
One issue the Treasury has failed so far to address is the possibility of any restrictions on access to the newly announced freedoms. This may mean that there will be none. But it seems unlikely that the Government will allow people to contribute one week, get tax relief and take out their 25 per cent tax-free cash the next.
This was a fear that prompted the introduction of many of the entry restrictions of flexible drawdown and with the proposals allowing access in much the same way, without the secured income restriction, it would seem sensible that some entry requirements would remain. This really could be anything from a restriction on tax relief or tax-free cash, the loss of the annual allowance, or even the removal of phased retirement.
Tax on death
The Government plans to consult on the 55 per cent lump sum death benefit charge, which applies to lump sums paid out from crystallised funds. This is linked to the consultation on the availability of tax relief after age 75, because although you can currently contribute after age 75 you won’t receive tax relief and would currently have the 55 per cent lump sum death benefit charge applied even on uncrystallised funds.
The consultation document only states that it will consult with stakeholders and that a flat-rate of 55 per cent will likely be too high in many circumstances.
This appears at first look to be positive, but it makes you wonder whether policymakers are planning to introduce variable lump sum death benefit charges. This makes it very difficult for advisers to plan, especially as there is no hint of what level or levels they are thinking. It seems reasonable to assume though that whilst pensions remain outside the estate for death when uncrystallised they will continue to be a useful IHT planning tool.
Timeline and planning
With so much unclear and no current sign of draft legislation, the deadlines for implementation and the closure of loopholes before April next year seems almost impossible. In all likelihood, the legislation will be in the Finance Bill 2015 and therefore not enacted before the facilities should be available.
This is not the first time this has happened – the industry faced a similar problem with flexible drawdown – and just as before it will probably deter some from advising on the new options for fear of changes that may creep in as the bill passes through parliament.
The uncertainty surrounding the proposals – not least Osborne’s “guidance guarantee” – means it is a challenging time for the industry.
But despite all this uncertainty, the Budget reforms represent an amazing opportunity for advisers given the need for careful planning and advice.
Claire Trott is head of technical support at Talbot & Muir