In December 2002 the
Government announced radical proposals to simplify the structure
of personal and occupational pension schemes. Whilst promising to
maintain generous tax incentives they wish to create easy to understand
and flexible structures for all contributors.
After industry consultation, the Government confirmed
the basic outline in the last Budget. For most clients these are
the key features:
| 1) |
The changes will come into
effect on 6th April 2006 (A Day). |
| 2) |
For Defined Contribution schemes the
maximum contribution will be £215,000 in tax year 2006/07.
Personal contributions will receive tax relief on the higher
of £3,600 and 100% of UK earnings. There is no limit
on the amount of contributions that employers can pay with
full tax relief. |
| 3) |
Individuals will be able to be members
of Defined Benefit and Defined Contribution schemes concurrently. |
| 4) |
A Lifetime Allowance of £1.5m will
exist in the first year. From this, 25% will be available
as a tax-free cash sum, with the remainder payable as an income.
Up to age 75 the income can be taken on an unsecured basis
(similar to Income Drawdown) subject to a minimum of £1
p.a. and a maximum of 120% of a single life annuity. Reviews
must take place at least every 5 years. Alternatively an annuity
can be bought. |
| 5) |
Pension funds in excess of the Lifetime
Allowance will be subject to a recovery charge of 25% and
can be taken as a lump sum subject to 40% Income Tax, or as
a taxable pension. Therefore an effective tax rate of 55%
applies. |
| 6) |
The minimum benefit age will increase
to 55 by 2010 and benefits must commence by age 75. |
| 7) |
At age 75 an annuity can be purchased,
or alternatively secured income can be taken, subject to a
maximum level equivalent to 70% of a single life annuity. |
| 8) |
On death, before retirement benefits
are taken, a tax free lump sum can be paid up to the Lifetime
Allowance (usually free of Inheritance Tax). Benefits above
the Lifetime Allowance are subject to the recovery charge,
unless providing dependents pensions. If unsecured income
is taken, a lump sum death benefit can be paid subject to
a 35% tax charge. Beyond age 75 if alternatively secured income
is taken, funds can be used to provide dependents pensions
or be used for other members’ benefits. |
| 9) |
For pension funds of less than 1% of
the lifetime allowance (i.e., £15,000) the whole amount
can be taken as a lump sum. 75% will be taxable. |
| 10) |
Scheme investments will be amended as
follows: - |
- |
shares in the employer will be limited
to 5% of the fund. |
- |
loans to the employer must be secured
on a first charge. |
- |
borrowings will be limited to 50% of
the scheme assets. |
- |
investment in assets capable of being
enjoyed by the members will be allowed, including the purchase
of residential property. |
In summary, most of the changes are
to be commended. However the limitation on scheme borrowings means
that those wishing to buy commercial property should consider doing
this before 6/4/06.
For those who will be affected by
the Lifetime Allowance on A Day or beyond, there are transitional
protection arrangements.
The above outline is intended only
as a guide and represents our interpretation of proposed legislation.
We strongly recommend that all pension contributors seek professional
assistance to fully understand the changes and how they may be affected.
