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How does the Budget 2014 affect my pension?

I have already taken my retirement benefits and take the maximum capped drawdown of £20,000 gross per annum from my pension fund, my formal pension review date is the 8th November 2015 how will the Budget affect the amount that I can take?

The maximum that you can withdraw from your pension fund, will generally automatically increase by 25% ie the uplift from the increase of the Government Actuarys Department (GAD) multiple from 120% to 150% on the anniversary of your review date following the 27th March 2014.  This increase from £20,000 to £25,000 gross p.a. will only take effect from the review date of 8th November 2014 and be fixed until the formal review date of 8th November 2015.

The GAD rate is defined as the level of income that can be taken from a drawdown pension which is based on a single life annuity using tables issued by the Government Actuary’s Department (GAD).

What is flexible drawdown?

If you have a secure pension income from other sources of at least £12,000 you can draw on all or part of your pension pot at any time but it will be subject to income tax at your marginal rate. You cannot accrue any pension savings in any pension arrangement during the tax year you take advantage of this facility.

What type of income qualifies me to apply for flexible drawdown?

Sources of income that are accepted as secure pension income are the State Pension, benefits from most final salary arrangements, secured scheme pensions and some lifetime annuities. Types of income that do not qualify would be for example, rental income or dividend income.

How much can be contributed to my pension?

The maximum amount that can be contributed to your pension with the benefit of tax relief is restricted to the Annual Allowance which for the tax year 2014/15 is £40,000. If you have other pension arrangements and the total of your “pension savings” exceeds that amount you will be charged to tax on the excess at your marginal rate.

However, if you have been a member of a registered pension scheme in any of the three previous tax years and contributions to all schemes in one or more of those years were below the annual allowance, the unused allowance may be carried forward to the next tax year and so on to the current tax year.

What is the maximum pension pot that I can accumulate?

The maximum amount that can be accumulated in all pension arrangements for your benefit without incurring a tax charge is known as the Lifetime Allowance. From 6th April 2014 the Lifetime Allowance is £1.25m.

If the value of all your pension benefits exceeds the Lifetime Allowance when you take benefits a tax charge on the excess will be incurred of 55% if you take it as a lump sum, or 25% if it is left in the scheme to provide income which is then subject to income tax at your highest marginal rate.

However, if you have been granted any form of protection (primary, enhanced, fixed or individual) of your benefits, you may not be affected and you will either incur a reduced charge to tax or none at all on your pension pot when you come to draw benefits.

When will my pension pot be tested against the lifetime allowance?

The most common events that will result in the value of your pension benefits being tested against the Lifetime Allowance are:

  • When you draw benefits from all or part of your pensions pot either in the form of a pension or a lump sum or both
  • When you use all or part of your pensions pot to buy an annuity or reach 75 in pension drawdown
  • When you reach 75 and you have not used all your pensions pot to provide benefits
  • When you die without having used all your pensions pot to provide benefits.

What is individual protection 2014?

Individual protection is designed for those who as at 5th April 2014 have a pension fund of at least £1.25m.

This form of protection allows you to protect your fund as at the 5th April 2014 on the lower of the fund value and a maximum limit of £1.5 million. Unlike some other forms of protection you can contribute whilst maintaining the limit of your personal lifetime allowance.

If you believe that this issue may affect you then you will need to get a formal valuation of your scheme as at 5th April 2014. This will be on all assets including property. You will then have until 5th April 2017 to apply.

Can I have individual protection 2014 with other forms of protection?

Yes, you can combine fixed protection and enhanced protection with individual protection but not with primary protection.

For further information on pension legislation, please contact Kerry Houghton on 01772 550614 or email Kerry.houghton@taypat.co.uk

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