Pensions
A-Day
Pension
Reforms:
what do they mean to you?
Nigel
Bourke & Co are currently offering a complementary A-Day
review to individuals who are determined to make the most of
the proposed changes.
Please
use our Enquiries link to request
further details.
|
The
world of pensions is due to change dramatically on 6th April 2006
(‘A-Day’). Whilst some of the new rules are still being
finalised, we now know with relative certainty what these changes
will be. They are extensive and in one way or another will affect
anyone who is serious about planning for their retirement.
In this article we will aim to summarise a number of the main changes
and give some guidance on how they may affect you. The following summary
is by no means exhaustive and you should seek specialist advice from
a financial planner if you feel that you will be affected by these
proposals in any way.
Lifetime
allowance
After A-Day, the maximum amount that anyone will be able to have invested
in their pension fund, without the possibility of a tax charge (‘recovery
charge’) when taking benefits is £1.5 million. The proposals
state that this figure will rise to £1.8 million by 2010.
The
value of your pension funds will be calculated in different ways,
depending on what type of pension arrangements you currently have.
Annuities in payment will be multiplied by 25 to obtain their capital
equivalent value. For final salary schemes, the pension before commutation
will be multiplied by 20. Income drawdown plans in payment will be
given a capital value by multiplying the maximum GAD (Government Actuaries
Department) withdrawal by 25. The capital value of personal pension
plans, retirement annuity contracts and money purchase occupational
schemes will simply be their A-Day value.
If the total value of your pensions is already over £1.5 million
or you think that it could reach this figure, the Inland Revenue may
apply a recovery charge of up to 55% on the excess.
There are two ways that you will be able to protect the value of your
pension benefits from this tax charge. These are known as ‘primary’
and ‘enhanced’ protection:
Primary
protection – this is available for those who want to register
a higher lifetime allowance at A-Day. Registering for primary protection
will provide the individual with a personal lifetime allowance (PLA)
which will be a percentage of the statutory lifetime allowance (SLA
- £1.5 million in 2006/2007). It is expected that individuals
will have 3 years after A-Day to apply for primary protection.
Example:
Andrew’s pension fund is valued at £4.5 million at 6th
April 2006 and he decides to continue paying into his pension after
A-Day. This gives him a PLA of 300% (i.e. 3 x lifetime allowance of
£1.5 million).
When he decides to vest his fund, it is valued at £5.7 million.
The SLA has increased to £1.8 million. This means that Andrew’s
PLA is £5.4 million,(i.e. 300% of £1.8 million). The fund
over £5.4 million will be subject to the recovery charge of
55% if taken as a lump sum or 25% if taken as income. Any income will
then be taxed at Andrew’s marginal rate of income tax.
Enhanced
protection – this type of protection is designed to help
individuals protect their future investment returns where they believe
that these might outperform increases in the lifetime allowance. If
the individual chooses this option, they must stop contributing to
all pension schemes from A-Day. This includes employer contributions.
If the individual selects enhanced protection and then makes a contribution
to a pension on or after A-Day, the enhanced protection is lost. If
the fund value at A-Day was above £1.5 million, he or she will
receive primary protection and a personal lifetime allowance. However,
if the fund was below the lifetime allowance they will forfeit all
protection from any potential recovery charges.
Example:
if Andrew had opted for enhanced protection, his entire fund, including
any future growth, would have been protected, although he would not
have been able to make any further contributions. If his fund was
valued at £5.7 million, the whole fund could have been taken
without any recovery charge.
Your
Action Plan
-
Obtain accurate records of all of your pension plans then contact
us to help you to calculate what your pensions are currently worth
and what they might be worth by 6th April 2006.
-
If the value of these funds is over £1.5 million or is likely
to surpass this in the years to come, decide whether primary or
enhanced protection would be most appropriate.
-
Maximum fund your pension between now and A-Day to make the most
of the protection options.
Tax-free
cash
After
A-Day, everyone will be able to take the lower of 25% of their pension
benefits or 25% of the lifetime allowance as tax-free cash. For certain
people, such as those with occupational pension schemes or section
32 plans, these changes may reduce the amount that can be taken as
a tax-free lump sum, in some cases quite significantly. A higher tax-free
cash entitlement can be protected at A-Day.
On
the other hand, if you have been contributing to an Additional Voluntary
Contribution (AVC) or Free Standing Additional Voluntary Contribution
(FSAVC) scheme you will currently have no entitlement to tax-free
cash. However, from A-Day, you will be entitled to draw up to 25%
of the fund as a tax-free lump sum.
In addition, the proposals suggest that it will be possible to take
a 25% tax-free cash lump sum from contracted-out (‘protected
rights’) benefits. No tax-free cash can currently be taken from
such benefits.
Your
Action Plan
-
Ask us to help you to calculate what your current tax-free cash
entitlement is and find out how best you can protect or improve
it in the light of the pension simplification proposals.
-
If you are thinking of taking benefits before A-Day, be very careful!!
Annual
Allowance
At present, the amount that you and/or your employer can contribute
into pension plans is limited by the Inland Revenue rules on contribution
levels and maximum benefits.
After A-Day, there will be an annual allowance of £215,000 which
will determine the amount that you can pay in, or the amount your benefits
can increase by each year without incurring tax charges. This annual
allowance is due to increase to £255,000 by 2010.
You will able to claim tax relief on contributions up to 100% of your
earnings (or £3,600 if lower) and your employer may receive tax
relief no matter how much they pay. However, there will be tax charges
applied to you where the total amount of contributions paid for your
benefits exceed the annual allowance.
Your
Action Plan
-
These new limits will ensure that the vast majority of people in the
UK will never have to worry about contribution limits again. However,
if you or your employer currently contributes more than the annual
allowance, care needs to be taken.
-
You should also consider whether to delay making a pension contribution
until a year when you are a higher rate taxpayer, to gain the higher
rates of tax relief available.
Earnings
Cap
At present, anyone who joined their employer’s pension scheme
after May 1989, or who is in a personal pension plan, is subject to
what is known as the ‘earnings cap’. This stands at £102,000
for the 2004/2005 tax year. For occupational schemes this cap limits
the amount of pension benefits available at retirement and for personal
pension plans, the amount that you can pay into your pension fund. The
earnings cap will be removed at A-Day.
The earnings cap does not apply to Retirement Annuity Contracts, also
known as section 226 pension plans.
Your
Action Plan
-
If you earn more than the earnings cap, or have the flexibility in
your remuneration to do so, you should contact us to discuss how its
removal will affect your pension planning.
Minimum
Retirement Age
From April 2010, the minimum retirement age will be increased to 55.
The good news is that you won’t need to stop working to draw benefits
from your pension scheme.
Your Action Plan
-
If you aim to retire before age 55, you may need to review your retirement
planning. It might make sense, for example, to draw on PEPs, ISAs
and other investments initially until you can draw on your pensions
or it might be best to draw your pension benefits before A-Day.
Taking
Benefits
The new rules will allow you to take your benefits in one of four ways:
1.
An income paid directly from the pension scheme. This kind of pension
is usually paid from company pension schemes.
2. Regular payments for life. This is when you use your pension fund
to purchase an annuity.
3. Income withdrawals. This will suit those people who don’t require
their entire fund to be used to purchase a pension or require a flexible
form of income in retirement. This will only be available until age
75. This will be very similar to the current Income Drawdown facility
although the income can be as little as £1 pa.
4. Alternatively secured pension. This is only open to those over 75.
The minimum income level will be £1 and the maximum level of income
available is 70% of a single life, level annuity with no guarantee at
age 75. In the event of death, where there are no qualifying dependents
it is possible to pay the value of the plan to provide either a payment
to a registered charity or to other members of a pension scheme nominated
by the member. The other members could be your children.
Your
Action Plan
-
If you are due to retire around 6th April 2006 it might make sense
to delay this until after A-Day. A good financial planner will be
able to tell you if there are any advantages in taking benefits now
or waiting until after A-Day.
-
After A-Day consider a ‘Family Pension Scheme’ to enable
tax efficient transfer of assets between generations.
We
hope that the above has provided a useful insight into some of the main
changes. A-Day is not far away and everyone should be giving careful
consideration to what impact the proposed changes will have on their
retirement plans. |