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If we were to include details and aspects of all the pension rules, we would be looking at a document which was over 200 pages.
We have therefore briefly summarised the changes introduced following the introduction of pension simplification on 6th April 2006. Commonly referred to as “A-Day” in the attached document.
However, with a combined knowledge of more than 85 years, four Advanced Pension Specialists and three Advanced Drawdown Specialists we are confident that there is no scenario which we have not already come across.
We are so confident of this, that if you present us with a request which we have never dealt with before, we will complete the work for FREE!
Contributions
There will be no limit on the level of contributions. However, personal contributions will only benefit from tax relief up to the higher of £3,600 and 100% of UK earnings. However, if total contributions for an individual by them and/or their employer exceed the annual allowance (which is noted below) you will be subject to a 40% tax charge on the excess, collected under self-assessment. Excess contributions cannot be ‘refunded’.
The Annual Allowance
This is how HMRC will limit tax relief on contributions.
• The Annual Allowance for contributions will be £245,000 (2009/2010) and £255,000 (2010/2011).
• Contributions will not be tested against the Annual Allowance in the year benefits start to be paid.
The Lifetime Allowance
This is how HMRC will limit tax privileges for an individual with “excessive” pension savings. Each time new benefits are drawn and a portion of the Lifetime Allowance will be used up.
• The Lifetime Allowance will be £1.75m (2009/2010) and £1.8m (2010/2011).
• If your fund exceeds the Lifetime Allowance a tax charge of 55%, if paid as a lump sum, will be payable. Alternatively a tax charge of 25%, if excess funds are used to provide an income, will be charged but then subject also to income tax – giving an effective tax charge for a higher rate taxpayer of again 55%.
Taxation
Before retirement:
Personal pensions are very tax-efficient as the contributions are deductible from the policyholder's earnings, thus gaining income tax relief at the basic rate of income tax at source, i.e. the premiums are paid net of basic rate tax. Additional tax relief is available to higher rate tax payers via their tax code.
The contributions are invested in a fund that accumulates free of UK tax on investment income and capital gains, although it is not possible for pension funds to claim the tax credits on dividends from UK equities. Nevertheless, the freedom from UK tax is still a significant investment advantage.
On retirement benefits:
The retirement income produced by the pension is treated as earned income, whether it is paid to the individual or their spouse or dependant. The life office will deduct basic rate tax from the payments and the annuitant's Inspector of Taxes will collect any higher rate tax liability.
Death benefits
On death before benefits begin, a tax free lump sum can be paid up to the Lifetime Allowance, provided you have not reached age 75. Any amount of lump sum death benefit paid over the Lifetime Allowance will be subject to 55% tax and will normally be free from IHT. A tax charge will not apply where death benefits are paid as dependants’ pensions, although the pension will be subject to tax at the recipient’s marginal rate of income tax.
Any protected rights benefits must be used to provide a pension for your spouse, if married at the date of death, if you are unmarried the fund will be paid as a lump sum but will form part of your estate for inheritance tax purposes.
Retirement Benefits
Under current legislation, the earliest age at which you are able to use your personal pension policy to provide you with retirement benefits is age 50 (55 from April 2010).
In general terms, the proceeds of the pension plan can be taken in two forms: part is available as a tax-free lump sum and the balance has to be taken as an income.
The tax free lump sum:
This benefit is optional, however, if it is chosen, it must be paid when retirement benefits commence and cannot be assigned to another party. The tax free lump sum will normally be the lower of:-
25% of the value of the pension fund; and
25% of the Lifetime Allowance (£437,500 for 2009/2010).
Retirement Income:
There are various options open to you when taking these benefits and it is always sensible to seek financial advice on your options at the appropriate time to ensure that the method you choose is the most suitable for your needs.
However, regardless of the method, by age 75 you must use any pension fund remaining to purchase a permanent income providing contract.
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