Pensions Simplification

Click here to download our mini guide on pensions simplification    

Changes in UK Pensions Legislation post-April 6, 2006 ("A-Day"):

• Lifetime Allowance, Enhanced and Primary Protection

• Lifetime Allowance - final salary schemes

• Types of Pension Plan - general considerations from April 6th, 2006 

• Tax-Free Cash and Transitional Arrangements/ Protection

• Annual Contributions Limits - Individuals

• Annual Contributions Limits - Employer Contributions

• Income Withdrawal, or Drawdown (now known as "Unsecured Income") rules

• Alternatively Secured Pension ("ASP")

• Trivial Pensions

Lifetime Allowance

There is a lifetime limit of £1.65 million (2008/9) applied an individual’s aggregate pension funds. This limit will increase to £1.8 million by 2010/11. The limit will then be reviewed every five years. People who may exceed, or have already exceeded this limit may obtain protect their interests under transitional arrangements, provided they take action.

There are two types of protection, enhanced and primary and where these apply, scheme members must register for them by April 5, 2009. 

Enhanced Protection: The fund value at A-Day must be registered. That fund may then grow tax-free to retirement, but no more contributions may be made to any type of plan thereafter.  Surpluses over the Lifetime Allowance arising from further contributions (or where no nomination is made) will suffer a 55% tax charge if taken as a lump sum, or 25% plus the recipients current tax rate, if taken as income. 

Primary Protection : This relates to funds already over £1.6 million. The fund value at A-Day must be registered. The fund may then increase by the equivalent increase in lifetime allowance. This will allow contributions to "top-up" to this allowance cap. Any surplus over the lifetime limits will be treated as for Enhanced Protection. 

Action Point: If your fund has exceeded or is likely to exceed the above limits at any time, then get advice as to your best course of action. Tax-free cash may also be a concern - see below.

Lifetime Allowance - Final Salary Schemes

For people in defined benefit (final salary) schemes, a single conversion rate of 20:1 (regardless of sex, age or state of health) will be used to convert those annualised benefits to check against the lifetime limit. 

Action Point 1: As above, if applicable take steps to obtain protection under transitional rules. 

Action Point 2: This will benefit high earners  (women in particular) where their scheme allows them to take their pension benefits early. Are you able to benefit from this? Call us or use the feedback form.

Types of Pension Plan - general considerations from April 6th, 2006 

One of the main achievements of Pensions Simplification is to reduce in number the types of retirement plan and their respective sets of legislation. As such, there are fundamentally only two types of pension plan going forward, namely "money purchase" (a.k.a. defined contribution) or "final salary" (a.k.a. defined benefit). 

There will be no limits to the numbers of pension plans of either type that an individual has running simultaneously. For example, this means that people in occupational (company) schemes who previously were limited to making extra contributions via AVCs  or FSAVCs (additional voluntary contributions, "free-standing" or otherwise), may now choose any type of money purchase plan they wish for their contributions. That would include for example stakeholder pensions and other personal pension plans.  

Hence, some types of money purchase arrangement will no longer be distinguishable from one another under this new regime. For example,  FSAVC's (Free Standing Additional Voluntary Contributions) should no longer be available for new contracts as the rules which they relied upon are redundant. 

Action Point: Post A-Day:  If you are in an older style FSAVC contract this may well be uncompetitive and you could benefit by transferring it to a new money purchase contract (e.g. a personal pension). Contact us to request a free evaluation of your FSAVC contract and to compare it to your other options under the new regime.

Tax-Free Cash and Transitional Arrangements/ Protection

The basic rule going forward is that the maximum tax-free cash lump sum will be 25% of the fund at retirement for all types of pension arrangement. This  now includes e.g.  AVC’s and FSAVC’s ( which previously did not directly give rise to tax-free cash). It will also include the value of " protected rights" money held in plans.

There are essentially three areas of concern under the transitional arrangements:

• Where tax free cash rights are greater than 25% of the uncrystallised rights, but are  less than £375,000 (25% of Lifetime Allowance of £1,500,000 - 2006/7) at April 5, 2006, and neither enhanced nor primary protection apply to the fund;

• Primary Protection applies and the tax free cash rights exceeded £375,000 at April 5, 2006;

• Enhanced Protection applies and the tax free cash rights exceeded £375,000 at April 5, 2006.

These are potentially complex areas and we recommend you contact us and seek advice.

Annual Contributions Limits - Individuals

Individuals can contribute the greater of 100% of their earnings or £3,600, each year, and receive full tax relief on those contributions, at their highest marginal rates, up to £235,000 (2008/9), (increasing to £255,000 by 2010/11). Individuals may contribute more than this cap, but will suffer a tax charge on the excess.  

Contributions above 100% of relevant earnings or the cap will attract a tax charge of 40%. 

The basis year rules for personal pensions have been dropped. The simple limit of £3,600 p.a. gross contributions is maintained, so non-earners (e.g. non-working spouses) and indeed minors may still have a personal pension with contributions up to this level. 

Action Point:  The relaxation of the old earnings cap and scrapping of the age/percentage limits which applied to personal pensions and Retirement Annuity Contracts, means far greater flexibility in planning you contribution levels. Contact us to work out a suitable plan for your pension.  

Action Point:  If you are used to contributing to your pension utilising a former basis year, then you will need to be advised on your new contribution limits going forward.

For final salary pension schemes, the annual allowance will be based on the increase in your pension benefits multiplied by a factor of 10:1. 

This applies therefore to the aggregate amount of employer and personal contributions paid on your behalf. For example, if your accrued pension benefits over the year increase from £25,000 to £30,000, then this would be valued at £50,000 (i.e. £5,000 x 10) for testing against the annual allowance.

Contact us for a free initial analysis of your position.

Annual Contributions Limits - Employer Contributions

The aggregate of employee and employer contributions applies to the annual limit (£235,000 in 2008/9) for tax relief purposes.  

The general principle for employer contributions is that there is no limit to the contributions and corporation tax relief available thereon, provided they satisfy the normal rules for allowable deductions under the ICTA 1988 - i.e. they must be wholly and exclusively for the purpose of the business. 

This means in practice that local tax inspectors may need to  make judgement calls  on company contributions. Presently there is no particular guidance on the subject,  but it may be that controlling directors who now apply significant company contributions to their pensions, (whereas  before they did not as they were limited by lack of net relevant earnings - paying themselves largely via dividends), may find that relief for such contributions will be restricted by the tax man.  

This limit does not appear to apply in the year of vesting – in theory a large lump sum could be paid by an employer, e.g. taking the pension “pot” up to the current Lifetime Allowance and obtaining tax relief as a business expense. An employee could likewise obtain tax relief up to the relevant earnings limit, with any excess over his 100% of relevant earnings not being subject to the normal excess tax charge of 40%.

Action Point: The potential for increased funding of pensions of all descriptions is significantly  enhanced, with potential for building-in salary sacrifice and changes in relevant earnings in the year of vesting.  Get advice from Bates on contributions planning, for both an on-going basis and for the final years. 

Income Withdrawal, or Drawdown (now known as "Unsecured Income") rules are amended and relaxed somewhat, (these amended rules also apply to pre April 2006 plans).

The maximum annual limit for income withdrawals is 120% of an equivalent annuity return (as set out in revised Government Actuarial Department "GAD" tables). Formerly this was 100%. The minimum annual withdrawal is now 0% (i.e. no income needs to be drawn). Reviews will be every 5 years, rather then every 3, and as before the unsecured pension must stop by age 75.

Action Point: All persons who have an existing plan should review and  obtain independent advice in the revisions.  

Action Point: (Post A-Day): Persons with large existing Income Drawdown plans must take care not to break the Lifetime Allowance. Pensions in payment are valued at 25:1; based upon an income level of  £64,000 this equates to £1.6 million: any other unvested funds  could potentially be taxable at 55% unless otherwise protected! If this could be you - contact us to clarify your position and if necessary protect it well before April 2009.    

Alternatively Secured Pension ("ASP")

The compulsion to take out an annuity at age 75 with all an individual's remaining pension funds was relaxed so that a person may take out an Alternately Secured Pension (ASP) plan.  Moreover, this may be placed under a Family Trust so that upon death, family members can receive the assets into their own pensions.

This will be alternative to an annuity, and is a from of pension fund withdrawal under which:

• There is no minimum income that must be taken. 

• Annual reviews are required to set the income limit, although the equivalent annuity rate is always based on the age of 75.

• After death, the fund must be used to provide an income for any dependents, or (in the absence of any dependents) a lump sum may be passed on for the benefit of another member of the scheme (e.g. a friend or relative ) or a charity ( in both cases nominated by the plan-holder).

 This will suit those who wish to keep their funds invested,  take a lower income than an annuity will provide, and wish to be able to pass on pension assets after death. Potentially, the assets within the Family Pension Trust could be passed from generation to generation. 

Action Point : (Post A-Day) This is a major change from the current regime. If this sounds of interest to you then you should contact us for further information on this important area of pensions planning.