Pensions legislative changes 6 April 2011.

06/04/2011

KEEPING YOU INFORMED OF THE LATEST CHANGES.

The Coalition government acted quickly to change the tax rules relating to pension contributions and the effective requirement to annuitise at age 75.

Following consultation over Summer 2010, draft clauses have been published for the Finance Bill 2011, which will come into effect on 6 April 2011. There are a number of changes, but the main areas are:

ANNUAL ALLOWANCE

The Annual Allowance for the tax year 2011/2012 is £50,000 (previously £255,000).

The Annual Allowance will not apply in the tax year in which a member dies or takes their benefits on the grounds of serious ill health.

Where the total of the contributions to all a member’s registered pension schemes exceeds the Annual Allowance in a given year, unused allowances from up to three previous tax years may be available. The Annual Allowance for each of the three tax years before the tax year 2011/2012 is assumed to be £50,000 for this purpose. To be able to use previous unused allowances the member must have been a member of a registered pension scheme in the year in which the unused relief is available.

LIFETIME ALLOWANCE

The Lifetime Allowance limit will reduce from £1.8m to £1.5m from 6 April 2012. Benefits over the lifetime allowance will be subject to a 55% tax charge on the excess.

To assist existing pension savers in protecting their benefit built up before this change HMRC is introducing a fixed protection option. This will allow those that elect fixed protection to retain the current £1.8m Lifetime Allowance. To elect Fixed Protection a customer must not make any further contributions on or after 6 April 2012 (excluding those for contracting-out or life assurance benefit). Restrictions will apply to transferring benefits.

TRIVIAL COMMUTATION

The trivial commutation limit will remain at £18,000 and the link to Lifetime Allowance will no longer apply. Triviality will be available after age 75.

INCOME WITHDRAWAL

Capped income withdrawal

• Income withdrawal will be known as ‘capped drawdown’. The maximum annual income changed to 100% of Government Actuaries Department limit (GAD) (previously 120%).
• Income reviews will need be made every three years up to age 75 (previously every five years) and every year thereafter.
• Drawdown can continue throughout life. (Previous available to age 75 only)
• Tax on death in drawdown or for lump sum benefits after age 75 will be increased to 55% (previously 35%).

Flexible income withdrawal

Flexible income withdrawal will be available to those who have a guaranteed for life income of at least £20,000 a year, including any state or private pension income. There will be no limit on the level of income that can be taken. Customers will have to declare that no contributions have been made in the tax year that flexible income withdrawal is taken. The income from flexible income withdrawal is not capped by HMRC.

We will not be offering flexible income withdrawal immediately, however it’s something we are currently investigating. We’ll keep you updated on any future developments.

DEATH BENEFITS

If the member/dependant is over age 75 when they die, or they are taking income withdrawal, any lump sum death benefit will be subject to a tax charge/withholding charge (this is currently 55% for the tax year 2011/2012).

Lump sum benefits will be tax free if they are paid to a charity.