The recent headlines about the UK pensions time bomb brought pensions firmly back into the spotlight. This issue was about people failing to save enough for their retirement and whether the state will be able to afford to support pensioners in years to come. Important and worrying as this is, there are other pension issues which the public (both already retired and approaching retirement) need to be aware of. April 6, 2006 will see the start of a new pensions regime in the UK. On this day – referred to as the pensions ‘A-day’ – the government’s Pensions Tax Simplification will introduce “a radical new tax regime for pensions… Simplification will sweep away the eight existing tax regimes and replace them with a single universal regime for tax-privileged pension savings” (Inland Revenue).
2006 may seem like a long way away, but, in legislative terms, this is just around the corner. It would be wise to familiarise yourself with the changes in advance, so that you can take action if necessary. The new regime is based on the Pensions Green Paper we heard so much about over the past few years, and the new simplicity will make life easier for individuals, employers and pension providers. There are downsides, however, such as the introduction of a ‘lifetime limit’ of £1,500,000.Anyone with funds over this limit will find that the excess will be severely taxed.
The aims of the new pension regime are plenty and, in summary, it will encompass:
1.A simpler process for registering pension schemes.
2.An annual allowance on the increase in value of an individual’s pension fund, which will attract tax relief.
3.A lifetime allowance for the amount of pension savings that attracts tax relief.
4.Employers’ contributions to registered pension schemes will continue to be deductible from profits chargeable to tax.
5. The minimum retirement age will rise from 50 to 55 by 2010 and the special low retirement ages for entertainers, sportspersons etc will be abolished.
6.Members of occupational pension schemes will be able to continue working while drawing retirement benefits.
7.Tax free cash lump sums on retirement up to 25 per cent of the member’s pension fund.
8.A common investment regime for all pension schemes.
9.Protection of pension rights arising before April 6, 2006 on funds in excess of the lifetime allowance.
All types of tax approved pension schemes, both occupational and personal, will be able to continue to be established under the new regime. The only exceptions are retirement annuity contracts (RACs), where a new contract cannot be established.The new regime will encompass a common tax and investment regime, accommodating large self-administered pension schemes, small self-administered schemes (SSAS), self-invested personal pension schemes (SIPPS), wholly insured occupational and personal pension schemes, and RACs. It will also accommodate funded and unfunded pension schemes, final salary and money purchase schemes and schemes which are contracted-out, or not contracted-out, of SERPS.
Unapproved pension schemes will not be treated as registered pension schemes.They may continue to exist, but their tax treatment will become much less favourable (they will be treated like other schemes providing taxable benefits to employees).
The current rules and limits governing contributions and pensions accrual for all pension schemes will be replaced by new lifetime and annual allowances. A new Single Lifetime Allowance of £1,500,000 will be introduced for 2006/07. This means that if the value of all your pension funds exceeds this amount, any excess will be taxed at punitive rates. The allowance will increase gradually over the years, as follows:
It will be reviewed every five years. This is the element of the Green Paper that attracted the most headlines, with calls for the allowance to be raised or scrapped altogether. The Inland Revenue initially claimed that only around 5,000 people would be affected, but independent analysts estimated that the number could be as high as 100,000.
If your pension funds exceed this amount you would be wise to seek advice from an independent financial adviser or pensions specialist before A-Day. A little advance planning could save a lot of tax (and headaches!) later.
The annual allowances on the increase in value of an individual’s pension fund have also been capped. You can put in up to £215,000 in the year 2006/07. This allowance will be increased by £10,000 each year until it reaches £255,000 in 2010/11. This will also be reviewed every five years.
Tax relief on contributions
The current earnings cap for tax relief and contributions will be abolished and replaced by the annual allowance on contributions subject to an earnings qualification. There will be no limit on the amount of contributions payable by a member or an employer, only on the amount that attracts tax relief. Tax relief on personal contributions will continue to be given at basic and higher rates of tax where appropriate.
Minimum retirement age
The minimum age at which individuals can start taking their (private or company) pension will be raised from 50 to 55 years by 2010. A pension must be taken by age 75.Income ‘drawdown’ (including phasing) will be permitted from age 55. It will not be necessary to retire to receive retirement benefits. As from 2006, the low normal retirement ages for sportspersons and entertainers will be abolished (though members with normal retirement ages below 50 agreed before A-Day may retain them subject to a reduced lifetime allowance).
I will continue this article next week, when I will look at the consequences of the new pension regime on retirement benefits (including tax free cash), investments, transitional arrangements, valuations and transfers.