New rules for lifetime annuities
The new flexibilities permit lifetime annuities to reduce as well as increase in value, outside the existing limited range of prescribed circumstances. Taking income from this new type of lifetime annuity will trigger the MPAA.
Money purchase annual allowance
The MPAA is a new anti-avoidance measure directed at income recycling. It’s set at £10,000 from 2015/2016. The MPAA can’t be carried forward. It only applies to money purchase contributions. Someone who’s affected can still fund a defined benefits scheme up to the normal £40,000 annual allowance, plus any carry forward allowance.
The MPAA applies:
• When income is taken from FAD.
• When income above 150% GAD is taken post 5 April 2015 from a capped drawdown fund.
• When a UFPLS is received.
• When a payment from a new style reducible lifetime annuity is taken.
• From 6 April 2015 for those already in flexible drawdown. They currently have no annual allowance.
The MPAA doesn’t apply:
• Where an individual commences FAD, but takes just tax free cash and no income.
• Where an individual is in capped drawdown and doesn’t receive income above 150% GAD after 5 April 2015.
• When an individual uses the small pots rules.
Death benefits
When death benefits are paid post April 2015, there’s no difference in treatment between crystallised and uncrystallised funds. The existing inheritance tax rules continue to apply.
• Money purchase death benefits can provide an annuity, FAD or a lump sum to any nominated beneficiary.
• Where the member dies before age 75, all types of benefit are tax free provided there’s sufficient LTA.
• If the member dies after age 75, annuity and FAD payments are subject to the beneficiary’s marginal rate of income tax. Lump sums are temporarily taxable at 45% until 2016/2017, when it’s planned they’ll be taxable at the recipient’s rate.
• Where FAD is used, the recipient can nominate their own beneficiary for unused funds, with the tax treatment based on their age at death.
• New LTA benefit crystallisation events test death benefits from uncrystallised funds.
• Dependant’s scheme pensions are still taxed at the recipient’s rate.
Bernadette Lewis is a Chartered Financial Planner at Scottish Widows
http://www.scottishwidows.co.uk/extranet/index
