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 On the 6th April 2006 (A Day) new rules were introduced which were a major overhaul of the pension system, designed to simplify the pension regime and iron out differences between different types of pension arrangement. As always, new rules are not always that simple!
The rules provide restrictions on how much can be saved for some whilst providing opportunities for others.
Retirement Age
The minimum retirement age for taking pension benefits is presently 50. You can however continue to work and take pension benefits at the same time with pension benefits being taken no later than age 75.
Lifetime Allowance
The main points are...
- To obtain the tax benefits there is a maximum lifetime allowance of what can accumulated of £1.6 million for 2007/08, increasing to £1.8 million by 2010/11.
- Benefits within a final salary scheme will be valued for these purposes using a factor of 20:1. For example, an annual pension of £10,000 equates to a fund of £10,000 x 20 = £200,000 plus whatever tax free cash lump sum is taken.
- More can be put in but there is no favourable tax treatment. There is a tax charge of 25% of the excess if you take additional pension which is also then taxed or 55% if taken as a lump sum.
- There are transitional provisions to provide protection in case you are likely to be disadvantaged including:
- Primary Protection - this is if you have already exceeded the lifetime allowance on A Day. This becomes your lifetime allowance which is jut increased with inflation.
- Enhanced Protection - this is where your fund is below the lifetime allowance on A Day but is likely to exceed it by the time of retirement. This will be allowed but no further contributions will be possible if so.
Annual Allowance
The main points are...
- For tax purposes, there is a maximum of £225,000 for 2007/08 that can be contributed in one year, increasing to £255,000 by 2010/11.
- For final salary schemes, the annual allowance is calculated by reference to the increase in pension benefits multiplied by a factor of 10:1 and not the actual contributions. So an increase in your accrued annual pension benefits of £10,000 is multiplied by 10 to give an equivalent contribution of £100,000.
- Personal contributions qualify for tax relief up to £3,600 without needing any earnings or 100% of earnings if greater.
- If the annual allowance is exceeded, the excess is taxed at 40%.
- There is no restriction in the annual allowance in the year that retirement benefits are taken.
Scheme Investments
In a U-Turn the chancellor didn't allow SIPPs and SSASs to invest in directly in residential property and some other prohibited assets such as art, fine wine, and antiques. There are significant tax penalties for such investments.
Subject to certain restrictions, the pension scheme can borrow to make investments and transactions between the scheme member and the pension fund are also allowed. There are also restrictions on loans to the sponsoring employer and share purchases in these companies.
Tax-Free Lump Sum
The main points are...
- You can take the tax-free lump sum before you retire or take a pension at that time.
- The maximum tax-free lump sum payment is 25% of the value the pension fund with an overall restriction of 25% of the lifetime allowance.
- You can take 25% tax-free cash from the whole pension fund including those from additional voluntary contributions and protected rights.
- Transitional rules allow you to still take 25% of the pension fund if in excess of 25% of the lifetime allowance.
Pension Income
There are various ways of paying pension income including...
- Lifetime Annuity - an annuity is purchased to provide an income for life from an insurance company.
- Income Drawdown - the pension income is taken from the assets of the pension scheme and can be varied in any year down to zero to help protect capital for the future.
- Alternatively Secured Pension (ASP) - this is the continuation of income drawdown after age 75 without the purchase of an annuity. There are restrictions on funds invested by ASP's from 6 April 2007 of...
- A minimum income requirement of 55% of a comparable annual annuity;
- Maximum income withdrawal of 90% of a comparable annual annuity;
- An unauthorised payments charge where the ASP fund of a member on death is transferred to the funds of other scheme members.
- Scheme Pensions - pension income is paid directly from the pension fund with income guaranteed by the employer and only suitable for larger schemes.
Death Benefits
The main points are...
- A tax-free cash sum up to the lifetime allowance can be paid on death before pension benefits have started.
- Also, your pension fund can provide dependants' pensions without any test against the lifetime allowance.
- Transitional protection is available for funds already in excess of the lifetime allowance on A Day.
Trivial Pensions
If your total pension benefits are 1% or less of the lifetime allowance which is £16,000 for 2007/08, you can now take these benefits in a lump sum of which 25% can be paid tax free and the balance as income. This has to occur in any twelve month period between the ages of 60 and 75.
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