|
|
|
Pension reform
Now that the dust has (almost) settled following the pension
reforms introduced in April 2006, it is a good idea to consider
the implications for clients.
The basic changes are well known, but it is worth summarising
them here:
- Personal contributions up to entire earnings (annual
allowance limit £215,000 for 2006/7 rising to £255,000
by 2010/11) attract tax relief at the member’s marginal
tax rate – excess contributions allowed but no tax
relief;
- Employer contributions can ‘top-up’ to annual
allowance, but only if justifiable as a business expense
– any contributions above the annual allowance attract
a tax penalty;
- Lifetime allowance £1.5 million for 2006/7, rising
to £1.8 million by 2010/11 – funds above this
level are subject to a Lifetime Allowance Charge at 55%,
but protection is available for larger funds registered
before 6th April 2009;
- Benefits can be taken from age 50 (rising to 55 on 6th
April 2010) and everyone is entitled to 25% tax free cash
even if they do not actually retire or start drawing an
income.
There are a number of potential implications for your clients,
especially those with larger pension funds, which create both
challenges and opportunities.=
- Those with funds above £1.5 million on 6th April
2006 should consider applying for primary protection (before
6th April 2009). This creates a “personal lifetime
allowance” based on the fund size at that date which
will increase in line with the (ordinary) lifetime allowance.
The Lifetime Allowance Charge will only apply in respect
of any amount by which the actual fund exceeds the personal
lifetime allowance when benefits are taken.
- Anyone, including those with smaller funds can apply for
enhanced protection (before 6th April 2009). This protects
the entire fund against the lifetime allowance charge, however
large it might grow, but no further pension contributions
can ever be made; if they are, enhanced protection is lost.
For this reason, those with funds above £1.5 million
who are applying for enhanced protection may also wish to
apply for primary protection in case they ever need to make
a pension contribution again.
- The impact of divorce settlements on lifetime allowances
and protection is complex and we can advise on this separately.
- The previous maximum funding rules meant that some people
– particularly those within occupational pension schemes
– were in practice unable to build up as large a pension
fund as is now possible. This was the result of the way
maximum benefits were calculated and could particularly
affect higher earners starting pension planning later in
life. The new rules mean that previous shortfalls can, in
many cases, be addressed.
Although the legislation progressed under the title of “pension
simplification”, it is clear that there is nothing at
all simple about the new regime except, perhaps, that there
is now only one regime for private pensions, rather than the
six or seven that previously existed. The key problem facing
younger people in particular will be more apparent when the
current review of state pensions is resolved. In this case,
most will find that they will not be able to receive state
pension benefits until they are 67 or even 68. This means
that planning for early retirement is even more challenging
Where can my clients go for help?
If you would like us to review any of your clients’
pension arrangements, please contact
us. |
