By: JOHN WESTWOOD
Email: [email protected]
New 82 per cent tax on pension funds
GORDON BROWN issued his pre-budget report on December 10, 2006 in which he introduced several new anti tax-avoidance rules, including one which could dramatically affect anyone with a UK private pension. The new rules could mean that, on your death, you suffer a tax charge of 82 per cent on your pension fund.
First of all, let me give you a little bit of background. People who are members of ‘registered pension schemes’ are allowed to draw an income direct from their pension savings, as an alternative to using those savings to buy an ‘annuity’. An annuity is an insurance product that delivers a regular income for life in exchange for a cash sum up front.
However, annuities do not currently represent good value for money and, if you die early, your unspent money stays with the insurance company and is called windfall benefit.
However, in recent years, people between the ages of 50 and 75 have been given the right to defer annuity purchase and draw down money every year (within fixed limits) from their pension savings direct. This is called an ‘unsecured pension’ or ‘income withdrawal’ and has proved very popular, with many thousands of retirees now taking advantage of this flexible way of managing their affairs, as they go through the early stages of something we call “retirement”. Using this method of deferring annuity purchase, means that people unlucky enough to die before they reach the age of 75 have been able to leave their unused pension funds to people they are related to, rather than to, for example, an insurance company
Alternatively secured pensions
New tax laws from April 2006, gave people over the age of 75 the chance to continue in a more restrictive form of income drawdown without ever having to buy an annuity. This is referred to as an ‘Alternatively Secured Pension’ or ASP for short. On the member’s death, income from the pension fund could continue to be paid to a dependent. Alternatively, if there is no dependent, the fund could be transferred to other members of the scheme or to a charity. No tax was charged on these transfers and, therefore, it was a very useful way of passing unused pension funds to, say, children within a family business. There had been considerable interest in this following the investment restrictions on self-invested pension plans (SIPPs) introduced in the 2006 Budget.
However, Gordon Brown’s new rules, which are proposed to come into effect on April 6, 2007, mean that retirees, over 75, will be forced to take a minimum income every year, equal to 65 per cent of the sum they would receive from a comparable annuity. Payments into other members’ pension schemes will also be classified as an ‘unauthorised payment’, and be subject to a tax charge of up to 70 per cent! The remainder would then be paid into the deceased’s estate and become subject to inheritance tax, resulting in a total hit on the remaining pension fund of 82 per cent!
Summary of changes to ASP
• A minimum income requirement will be re-introduced of 65 per cent of the annual amount of a comparable annuity for a 75-year-old. There is currently no minimum income level.
• The maximum annual income will rise from 70 per cent to 90 per cent of the annual amount of a comparable annuity for a 75-year-old.
• On the death of an ASP member, a transfer of any remaining ASP funds to your dependant’s pension fund will become an unauthorised payment and will be subject to a tax charge of up to 70 per cent. This effectively puts an end to the idea of passing pension assets on to other family members.
• It will no longer be possible to make pension payments for up to 10 years under a guarantee from an ASP fund.
The upshot of all this is that Gordon Brown has struck yet another death blow to pension funds. Over recent years, there has been enough damage done to dissuade people from investing in pension schemes and this new rule now appears to be, for some, the “final blow”. Given that every successive Government looks for ways to encourage people to be self-sufficient in retirement, Gordon should be encouraging investment by raising tax relief, not removing it at every opportunity.
Pension Planning seems to be an ever complex subject. Anyone considering taking retirement benefits from their UK funds should seek professional advice on which alternatives will suit them. This exercise is increasingly important if you have non UK resident status.