By JANE GOODALL
Jane Goodall is the Director of International Pensions for Blevins Franks.
IF THE total of your UK pension benefits exceeded 1.5million Pounds Sterling as at April 5, 2006, you MUST apply to HM Revenue & Customs for protection before April 5, 2009.
If not, you are at risk of losing a considerable part of your pension fund to the UK taxman at punitive rates of up to 55 per cent, as it may be over funded under the new rules. This will apply whether you are UK resident or not.
These rules were introduced as part of the new Pension Regime which began on April 6, 2006. A ‘lifetime allowance’ was introduced on the amount that can benefit from tax relief. If, when benefits become payable, the lifetime allowance is exceeded, a tax charge will arise on the excess funds. The allowance will be tested when benefits vest. Pension scheme members with funds greater than the lifetime allowance were offered the possibility of applying for pension protection to avoid any tax charge on the excess – but this must be done before April 5, 2009.
Most people believe that the value of your pension funds is used to calculate how much of your lifetime limit you have utilised, but this is not always the case.
Which of the following applies to you?
i) All of my pensions started paying benefits before April 5, 2006
ii) None of my pensions started before April 5, 2006
iii) Some of my pensions started before April 5, 2006, but I have others that I haven’t taken yet
If you fit into the first category you have nothing to worry about and needn’t do anything.
If you fit into the second category, you need to check that the combined value of all of your pension benefits will not exceed the lifetime allowance for the year in which you take your benefits – the allowance for the current UK tax year (2008/2009) is 1.65m pounds (at the moment the lifetime allowance increases each year, however, from 2010 to 2015-16 it is frozen at 1.8 million pounds). You need to consider that while you might not exceed the lifetime allowance this year, you might do so next year.
However, if you are receiving (or will be receiving) a ‘Scheme Pension’ from a previous employer’s pension scheme which started after April 6, 2006, then it will be calculated against the lifetime limit at 20 times the annual income – i.e. 20 times 50,000 pounds p.a. = one million pounds. Therefore if you are in this position you may have already used up more of your lifetime allowance than you thought and if you have any further pensions in deferral, these could take the total over the lifetime limit and into a tax charge.
If you fall into the third category and you have a combination of pensions, some which started before April 6, 2006 and some which either started after or haven’t yet started, the situation is potentially more alarming. All private and company pensions that commenced payment before April 6, 2006 and continued in payment after this date, irrespective of the type of pension, are valued at 25 times the annual income – i.e. 50,000 pounds p.a. times 25 = 1,250,000 pounds rather than any fund value. The addition of other pensions that are in deferral could take you over the lifetime limit and into a tax charge.
Beware the income drawdown trap
If you have fallen into the third category above, then the calculation is not 25 times the income that you were taking from the scheme but 25 times the maximum income that you could have potentially taken – which could be somewhat higher! For example:
John has an existing Pension Fund Withdrawal policy (formerly Income Drawdown), which commenced in 2004. The fund value of this plan currently stands at 600,000 pounds, exactly the same figure as on April 5, 2006.
John is drawing an annual income of 19,000 pounds per annum, which is comfortably below the maximum that he could take (which under current rules is 70,000 pounds per annum).
John also has an old style pension contract which was taken out many years ago. He has not yet taken any benefits from this policy but is planning on now doing so. The fund value of this policy is only 200,000 pounds, and the value has not changed since April 5, 2006.
Therefore, the total fund value of John’s pension arrangements amounts to 800,000 pounds.
At first glance it would seem quite ridiculous that John should even consider bothering with pension protection, as it surely cannot apply to him.
However, the truth is far different. This is because for pension protection purposes, John’s Pension Fund Withdrawal plan will be valued at 1,750,000 pounds. This figure is arrived at by taking the maximum income that he could take of 70,000 pounds and then multiplying this figure by 25.
The value of John’s other pension contract is 200,000 pounds, giving John a total ‘pensions benefit’ for pension protection purposes of 1,950,000 pounds.
If John obtains pension protection now, when he takes benefits from his old style pension there will be no additional tax to pay.
If John does not obtain pension protection then his benefits of 1,950,000 pounds exceed the current lifetime allowance of 1,650,000 pounds by 300,000 pounds. This excess will attract tax of 165,000 pounds (55 per cent of 300,000 pounds).
Remember that you only have until April 5, 2009 to apply for protection. If you have any doubt on this, you MUST take professional advice. It can take several weeks to process the protection application so don’t leave it too late.
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