On 14 October 2010 the Government published its latest proposed amendments to our pension legislation and as is invariably the case what The Government gives in one hand they invariably take away in another. What’s important is does this affect you now and in the future?
Here is a summary of the changes;
- The lifetime allowance i.e. the maximum size of your pension fund at retirement will be reduced from £1.8 million to £1.5 million on 6 April 2012.
- Fixed protection is a new concept and will be available to protect funds up to £1.8 million but you will not be able to make any further contributions to your money purchase pension arrangement. Applications must be received by HMRC by 5/4/2012.
- You may still commute your pension to cash if the fund value does not exceed £18,000 – remember this is in total for all your pension funds.
- The maximum annual pension contribution limit has been reduced to £50,000 with effect from 6/4/2011. You may think you are not going to breach the limit but if you have or know people who have final salary occupational pension schemes, for example they have been long standing members of the NHS scheme, this limit can be more easily breached than you might think.
- There will no longer be a need to purchase an annuity at age 75 and the tax penalties upon death are far more favourable post 75.
- The tax penalties applying to a pension contract known as an unsecured personal pension (drawdown) are significantly increased from 35% to 55% for lump sums being passed on upon death. This only applies where benefits have commenced from the pension.
- If you have a drawdown contract the level of withdrawals will remain untouched until the 5th anniversary review but will then recalculated with the maximum income being reduced from 120% of the Government Actuary Departments calculated figure to 100%. This type of contract will become known as Capped Drawdown. Reviews will become 3 yearly pre 75, annually for the over 75’s.
- A new style of unsecured pension will be introduced called ‘Flexible Drawdown’ and available from age 55. Unlimited drawdown of funds will be available and taxed at your highest marginal rate but you will need to prove that you have secured income of £20000 per annum, which includes the basic state pension. No further pension contributions can be made.
- A pension commencement lump sum will now be available from a contract beyond age 75 but will be taxed at 55%.
- The concept of carry forward returns for maximising pension contributions where there is unused allowance in the immediately preceding 3 years provided you were a member of a registered scheme in the carry forward year.
- Retirement on the grounds of ill health for someone who has deferred their pension to beyond age 75 will mean a tax charge of 55% if the pension is paid out as a lump sum.
As with anything of this nature professional advice should be sought. This guest article has kindly been provided by Amanda Barnett of Grosvenor Consultancy Ltd. This really is an outline of the provisions and if you would like more information and how the changes may affect you please contact Amanda direct:
Independent Financial Adviser
Grosvenor Consultancy Ltd,
9 High Street, Highworth Wilts, SN6 7AG.
Telephone 01793 766123,
Grosvenor Consultancy Ltd are authorised and regulated by The Financial Services