Changes to drawdown, trivial commutation, and small pots commutation

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Changes to drawdown, trivial commutation, and small pots commutation
  • Introduction
  • Flexible drawdown and capped drawdown from 6 April 2011
  • Flexible drawdown and capped drawdown from 27 March 2014
  • Trivial commutation lump sum
  • Other small lump sums ― small pots

Introduction

In his 2014 Budget speech the Chancellor made the following statement:

“We will completely change the tax treatment of defined contribution pensions to bring it into line with the modern world.”

He went on to say:

“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”

The effect of that statement was to change fundamentally the pensions benefits system in the UK.

Changes to the rules associated with drawdown, trivial commutation and small pots commutation from 27 March 2014, as described below, were interim steps to the reforms introduced from 6 April 2015.

Flexible drawdown and capped drawdown from 6 April 2011

Before April 2011, because of the tax treatment of the remaining fund on death (referred to as the ‘left over fund’) if a registered pension scheme member had not used his unsecured pension fund to buy an annuity by age 75 or later death (when a total tax burden of up to 82% could apply), this was regarded as being an effective compulsion to buy an annuity prior to that age.

The Government undertook to change this position and did so by introducing rules from 6 April 2011 which:

  • enabled individuals with defined contribution pension rights from which they had not yet taken benefits to defer taking benefits indefinitely. Therefore the requirement to take benefit in some form by age 75 (including the pension commencement lump sum) was removed.
  • set the maximum permitted income that may be drawn down at 100% of the GAD rate applying.

More on Registered pension schemes: