Pensions – All Change Again!
Want to know how to make a pensions lawyer laugh (yes it is possible!)? Just say the words ‘Pension Simplification’. Pensions have felt like a political football since Finance Act 2004 introduced massive pension changes and the concept of A-day. The new coalition Government is making yet further changes to how we save for, and take funds from, our pensions.
The draft Finance Bill for 2011 was issued on 9 December 2010. Royal Assent is not expected until July 2011, so it is possible the laws summarised below may change before they are enacted. Comments on the draft legislation were invited before 9 February 2011.
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Summary of the changes
- A reduced annual allowance will have effect from 2011/12
- A reduced lifetime allowance will apply from 6 April 2012
- There will be no requirement to take a lump sum or ‘annuitize’ by age 75
- New concepts of ‘capped‘ and ‘flexible drawdown’ will apply from age 55
- A 55% ‘recovery charge’ will apply to lump sums post-75 or from drawdown funds
The current annual allowance is £255,000 but this will be reduced to £50,000. This limit will apply to all Pension Input Periods ending in 2011/12 but with transitional rules from 14 October 2010.
Any pension contributions in excess of the annual allowance are subject to the ‘annual allowance charge’. This will now be linked to the individual’s marginal income tax rate.
Any unused annual allowance can be carried forward for up to three years as long as the individual was a member of a registered pension scheme in that period. It doesn’t appear to matter whether the member actually contributed in those years.
The annual allowance does not apply for the tax year in which an individual dies. From 2011-12 onwards, the annual allowance charge will apply in the year pension benefits are drawn except where the benefits are in the form of a serious ill health lump sum. This is where the member either is not expected to live more than 12 months, or will not be able to undertake gainful work in any capacity in the future (otherwise than to an insignificant extent). The charge will also apply to those who have enhanced protection.
Inflation-linked increases in pensions for deferred members will not count towards the annual allowance test.
Reduction of lifetime allowance
The current lifetime allowance (‘LTA’) is £1.8 million but, from 6 April 2012, it will be reduced to £1.5 million until further notice. This is the maximum amount an individual can have in his/her pension without a tax charge arising.
A new “fixed protection” regime will permit members to retain the LTA of £1.8m on condition that they no longer contribute to their pension or accrue pension benefits. Application for this protection must be made before 6 April 2012.
Individuals who are already entitled to primary protection and/or enhanced protection will continue to receive their current levels of protection.
Removing the Requirement to Annuitize by Age 75
From 6 April 2011, both unsecured pensions and Alternatively Secured Pensions will be replaced by a new system of ‘capped’ drawdown. This will be available from age 55 but with no upper age limit. This removes the requirement for members to buy an annuity by age 75.
The minimum income will be nil (at all ages) and the maximum will be capped at 100% of the equivalent annuity Government Actuary Department (GAD) rate. Income reviews will be required at least every three years until the end of the year in which the member reaches age 75. Post age 75, reviews must be carried out annually.
There will be no requirement to take a Pension Commencement Lump Sum by 75.
A new concept of Flexible Drawdown will apply where members have Minimum Income Requirement of at least £20,000 a year; they will be able to access the whole of their pension as income without limit. Once in Flexible Drawdown the annual allowance charge will apply to any further funds contributed.
Individuals taking funds under Flexible Drawdown, whilst resident outside the UK for less than five full tax years, will be liable for UK income tax in the tax year when they become UK resident again.
The ‘recovery charge’ of 55% will apply to lump sum death benefits paid from drawdown funds. The same charge will apply after age 75 on all lump sum death benefits, irrespective of whether the pension was in drawdown, unless donated to charity. Death benefits for those who die before age 75 without having taken a pension will remain tax-free.
The changes above will also apply to members of non-UK pension schemes, which have received tax relief on contributions or where funds were transferred from UK registered pension schemes, such as to a Qualifying Recognised Overseas Pensions Scheme.
Inheritance tax charges will no longer apply to drawdown pension funds, even when the individual dies after reaching the age of 75. This means the maximum tax rate on ‘unused’ pension funds will be 55% rather than 82%, as previously.
With effect from 6 April 2011, IHT anti-avoidance charges that apply where a member omits to take retirement entitlements will be removed. If the pension scheme trustees have no discretion on paying out a lump sum after the death of scheme member (i.e. where amounts must be paid to their estate), this will remain subject to IHT. IHT will also continue to apply to all other lump sums (i.e. those in a non-Registered Pension Scheme or non-Qualifying Non-UK Pension Scheme [QNUPS]).
Anyone nearing pension age should obtain financial advice on their options, to see whether it is better to wait until these new rules come into force before crystallizing their benefits.
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