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Budget changes - pension flexibility and changes to Finance Bill 2014

On 27 March 2014 the government announced it would bring forward legislation in Finance Bill 2014 to ensure that people don't lose their right to a tax-free lump sum if, instead of buying a lifetime annuity, they use the:

  • new flexibility introduced from 27 March 2014
  • further new flexibilities to be introduced from April 2015

GOV.UK news story: Pensions freedom for 400,000 hardworking people from today (Opens new window)

HMRC has today provided more information to help people who want to use the new flexibility. This information is for people who have:

  • received or will receive a tax free lump sum before 6 April 2015
  • received a tax-free lump sum on or before 27 March 2014, and either
    • cancelled an annuity contract within the cooling-off period on or after Budget day (19 March 2014) that was linked to that lump sum
    • have not yet decided how to access the rest of their pension savings

Further detail is set out below on whether or not the unravelling of actions that were taken shortly before the Budget changes were announced will give rise to a tax charge. This information relates to how the tax rules will apply. The options available to you will depend on what your pension scheme decides to allow. All references to an annuity mean a lifetime annuity.

On this page:

Individuals who can already take advantage of the flexibility introduced from 27 March 2014

You can already take advantage of the 27 March 2014 changes in the following circumstances without waiting for changes to the Finance Bill if:

  • your pension scheme has not yet paid your tax-free lump sum or set up your annuity or pension
  • your pension scheme has paid you your tax-free lump sum, and bought your annuity but you cancelled the annuity contract within the cooling-off period and entered into drawdown with your pension scheme
  • your pension scheme has paid you your tax-free lump sum, your annuity contract is set up but your total pension rights (in all pension schemes including those in payment and any tax-free lump sums) are £30,000 or less and you meet all the requirements to immediately take the annuity as a taxed trivial commutation lump sum (the annuity contract must be turned into the taxable lump sum and cannot be cancelled in these circumstances)
    Requirements to take a trivial commutation lump sum
  • your pension scheme has paid you your tax-free lump sum, your annuity contract is set up but the value of your annuity is £10,000 or less and you meet all the requirements to immediately take the annuity as a taxed small pot lump sum (the annuity contract must be turned into the taxable lump sum, it cannot be cancelled in these circumstances)
    Requirements to take a lump sum of up to £10,000 from an occupational or public service scheme
    Requirements to take a lump sum of up to £10,000 from a personal pension scheme

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Individuals who will be able to use the new flexibilities

The government has introduced legislation in Finance Bill 2014 so that if you want to take advantage of pension flexibility after changes are made in Finance Bill 2014 and you have recently received your lump sum, it will remain tax-free in the following circumstances:

  • your pension scheme has paid you your tax-free lump sum, you have bought an annuity but cancelled the annuity contract within the cooling-off period and both the annuity purchase price and the lump sum have been paid back to your pension scheme
    • you want to use the pension flexibility that took effect from 27 March 2014 - you will be able to use this flexibility from when the changes become law
    • you want to wait to use the pension flexibility from April 2015 - you will be able to use this flexibility from that date
  • your pension scheme has paid you your tax-free lump sum, you have bought an annuity but cancelled the annuity contract within the cooling-off period and while you have kept the lump sum, the purchase price for the annuity either
    • has been paid back to your pension scheme
    • is held temporarily by the firm that arranged your cancelled annuity contract
    • is transferred to another firm in order to access drawdown
      • you want to use the pension flexibility that took effect from 27 March 2014 - you will be able to use this flexibility from when the changes become law
      • you want to wait to use the pension flexibility from April 2015 - you will be able to use this flexibility from that date

If the option of keeping your lump sum is open to you and you decide to do so, you will need to be aware that you will have received the final value of your tax-free lump sum, even if the rest of your fund grows before you take advantage of the new flexibility. On the other hand the tax exemption for the lump sum won't be affected should your fund fall in value by the time you take advantage of the new flexibility.

In practice, it will be up to pension schemes and providers to decide the options under the new flexibility that they will allow so people who want to use the new pension flexibility will find themselves in many different situations. If you have recently received your tax-free lump sum and cancelled your annuity contract or not yet decided how to access the rest of your pension savings, your pension scheme or provider will be able to help you find a solution so that your lump sum remains tax-free. You will also be able to use the pension flexibility from April 2015 if you receive a tax-free lump sum after 27 March 2014 under either:

  • the scheme that paid the lump sum
  • another scheme to which you have transferred the funds in order to access drawdown

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Individuals who already receive their pension income

These changes will not apply to you if you have received a tax-free lump sum, and started to receive an income and the cooling-off period has ended. As set out in paragraph 3.22 of the 'Freedom and choice in pensions' consultation document, you will remain bound by the contract made with your annuity provider.

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UK scheme administrators with returned funds

If you have paid a tax-free lump sum to an individual and arranged for an annuity contract (either with you or another annuity provider) and the funds are returned to you because the individual has paid back their lump sum and cancelled the annuity contract so that they can access their pension savings using the new flexibility:

  • the original benefit crystallisation events (BCE 4 and BCE 6) are also to be treated as cancelled

If the lump sum is not returned but there is no related annuity or drawdown:

  • the lump sum will be treated as a BCE 6, with the amount paid as the 'permitted maximum'
  • the lump sum will not be treated as an unauthorised payment unless the entitlement to the associated pension does not arise before 6 October 2015

This will apply whether the individual wants to take advantage of the flexibility allowed from 27 March 2014, or the proposed further flexibility from April 2015.

Further information on the changes to Finance Bill 2014 introduced by the Government (PDF 112K)

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