Pension Reforms – A Time for Review
On December 9, 2010 the Government announced its proposals for Pension Reform. Once finalised, most of the legislation will apply from April 6, 2011. This along with previous news that the lifetime allowance is to be reduced to £1.5m and the annual allowance reduced to £50,000, makes pension reviews a high priority.
The key changes you should know about are listed below. Click on a proposed change for further details and how this could affect you:
£1.5m Lifetime Allowance
The amount at which an individual can save tax-free within a pension scheme is dropping from £1.8m to £1.5m in April 2012. Fixed protection is available for those who feel they will breach this allowance or are already over this figure. This means that providing no contributions are paid after April 2012 and fixed protection is applied for, the lifetime allowance will be fixed at £1.8m and 25% of this can be drawn as a tax-free lump sum. This is a great opportunity to top-up any shortfall now and protect this going forward until benefits are drawn. These rules also apply for those with existing protection, but care should be taken because protection just on the fund and not on the tax-free lump sum will see a significant fall in the amount of tax-free cash that can be drawn.
Carry Forward
New rules allow annual contributions up to £50,000 and it will also be possible to Carry Forward any unused allowance from the previous three years measured against the £50,000 threshold. Whilst this may help alleviate the possibility of exceeding the allowance and incurring a penalty charge, given the timeframes, employers and individuals do not have long to react before the new legislation comes into place.
Capped Drawdown
Unsecured Pension (USP) and Alternatively Secured Pension (ASP) will be replaced with a single mechanism to be known as capped drawdown. The drawdown limit is falling from 120% to 100% of standard GAD rates. This means individuals drawing maximum benefits are likely to see their pension income fall significantly at the next review. Those on ASP however will have a rise from 90% to 100% of the GAD rate. Those not drawing maximum income could consider doing so until their next review. The review timeframes are also changing from every five years to every three years.
Flexible Drawdown
Individuals who can demonstrate they satisfy a minimum income requirement of £20,000 throughout retirement will be able to drawdown unlimited amounts from their pension fund. This means that subject to tax, the amount remaining can be taken more flexibly. However professional advice should be sought to ensure benefits are not taken to a less advantageous tax regime. Taylor Patterson offers Scheme Pensions, a method by which individuals can secure pension income and can combine all of the pension requirements within one product.
IHT Rules On Death Benefits Relaxed
Individuals can defer drawing any benefits from pension schemes until age 75 and providing funds are not drawn, the benefits can be passed onto beneficiaries free of Inheritance Tax. It is anticipated that many will take advantage of this and live off other sources of income and capital until age 75.
Death Benefits
Death benefits remain tax-free for those who die before age 75 without having taken a pension. Those with undrawn funds who die after age 75 will be taxed on death at 55%, as will all funds from drawn benefits. This represents a tax decrease for most individuals because statistically more people die post age 75. Unused drawdown pension funds of a deceased member with no living dependents may also be donated to charity tax-free both pre and post-75.
The removal of annuitisation at 75
It is now possible to draw lump sum benefits post-75. However it is anticipated many would take the opportunity to draw the tax-free pension commencement lump sum at age 75 because the tax will increase to 55% whether benefits have been drawn or not. It is recommended you contact your financial adviser to begin the review process as soon as possible.
This is based on our current understanding of the proposed legislation and are our initial thoughts. Other opportunities are expected to arise as we gain a better understanding of how this new legislation is to be applied. The key is to contact your financial adviser for advice and to begin the review process as quickly as possible.
