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Pension freedoms FAQ: the top 5 questions Pru receives

The pension freedoms are still leaving people scratching their heads. Here, some commonly asked questions are cleared up by a member of Prudential’s Technical helpline team.

Prudential’s Technical helpline for financial advisers answered around 8,000 pensions questions in the past year. Despite being three years since the introduction of pension freedoms, the changes still cause confusion.

Prudential’s Technical helpline for financial advisers answered around 8,000 pensions questions in the past year. Despite being three years since the introduction of pension freedoms, the changes still cause confusion.

Does taking income from a defined benefit (DB) scheme trigger the money purchase annual allowance (MPAA)?

Taking a scheme pension from a DB scheme is not ‘flexible’ access, so it does not trigger the MPAA. Nor does DB accrual use up MPAA. Remember your client cannot use carry forward to increase the MPAA limit.

When a client triggers the MPAA, they still have normal annual allowance and the MPAA works within this. If they use all their MPAA of £4,000, this leaves up to £36,000 plus any available carry forward for money purchase contributions (paid pre-trigger date) and all DB pension input amounts.

However, this may be less than £36,000 if a tapered annual allowance (TAA) applies. This is because TAA replaces the standard annual allowance and applies to all pension input amounts for the client, i.e. defined contribution (DC) and DB input amounts.

My client received a pension commencement lump sum (PCLS) of £9,500. As this is below 1% of the current standard lifetime allowance, do you agree PCLS recycling will not apply?

There are six criteria that all must apply for PCLS to be an unauthorised payment due to recycling. The pension freedoms changed one of these, which related to payments paid/received within a 12-month period. Previously the PCLS limit was 1% of the standard lifetime allowance. But this changed to a monetary amount of £7,500.

Advisers should consider the other criteria for this case to see if they can discount one of them. The full list is shown in HM Revenue & Customs’ (HMRC) ‘Pensions Tax Manual’.

My client has died and her pension scheme does not offer flexible death benefits. Can the death benefit be transferred to a scheme that will provide beneficiary drawdown?

Legislation does not allow this. Pension death benefits must be settled using the options available in the scheme that holds the pension at the member’s date of death. If that scheme does not offer beneficiary drawdown, it is not possible to have it.

Scheme rules determine the options available and they do not have to offer flexible death benefits. It is important to check this out when your client is alive. It is too late to transfer a pension once your client has died.

What tax is due on death benefits paid from a DC scheme where the client died after age 75?

Where the beneficiary is an individual (not acting as executor or bare trustee etc.), tax is paid at their highest marginal rate. This is regardless of whether they take the death benefits as a lump sum or as an income (either flexi-access drawdown or lifetime annuity).

If the beneficiary is a discretionary trust, the special lump sum death benefits tax charge of 45% is deducted by the scheme administrator. The balance is paid to the trust. The trustees will pass on the relevant tax credit when distributing trust monies to the ultimate beneficiary. Meanwhile, the beneficiary must contact HMRC to sort out any tax refund due.

Can an occupational DC pension pot of £17,000 be paid under triviality rules?

Although trivial commutation lump sum rules, which allow taking out a small pension in cash, still exist, the pension freedoms restrict these to DB schemes and some money purchase scheme pensions already in payment. A new payment type, uncrystallised funds pension lump sum (UFPLS), allows flexible access to part, or all, of a member’s pension fund. Each UFPLS payment usually has 25% paid tax-free. The balance is subject to marginal rate tax.

If a scheme offers UFPLS, the member’s pot can be fully extinguished without having to buy an annuity or designate funds after PCLS to flexi-access drawdown. Any UFPLS triggers the MPAA. To avoid this, perhaps explore the small pots rules.

Jacqueline Clezy is technical specialist at Prudential.

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