News/Events

Pension Changes [11th September 08]

Over the last year or so, I have mentioned the topic Pension Simplification and that many changes were made to pension legislation, so say, to make pensions easier to understand. In fact, in my opinion, this area is now much more complex than ever before and now with even many more anomalies.

Two weeks ago I touched on “Baby Boomers” whereby from 6^th April 2010, you will have to be 55 in order to take your benefits under a pension plan. It is surprising how many people find it necessary to raid their pension fund early eg before their normal retirement date in order to take the maximum tax free cash sum but do not take the income option available. One of the new rules brought in by the Inland Revenue makes it no longer a requirement to take a minimum level of pension which was originally 35% of the maximum allowable. From April 2006, you can have zero income or up to 120% of the GAD (Government Actuaries Department) limit. Put into somewhat more simple terms, this limit is the income a single individual could derive from buying a basic annuity from an Insurance Company.

Going off on a slight tangent, another change introduced related to the amount of contribution that could be paid into a personal pension plan. The somewhat confusing percentage of income dependent upon age at the beginning of the tax year, was amended so that you can now pay a maximum sum equal to the level of your actual earnings in a tax year and receive tax relief at the basic rate or higher rate if applicable, subject to an annual limit, currently £235,000.

So, if you do decide to take cash from your pension but there is no need for the income option and your earnings exceed the maximum income that is allowable, TAKE THE MAXIMUM! Quite simply, if you channel the income into a new personal pension plan, then:-

• In the event of subsequent death, the Insurance Company would pay out 100% of the current value. Whereas, once you have fully opened your pension plan e.g. taken the 25% tax free cash, the maximum lump sum payable on death is 65% of the value. There is 35% tax charge.
• When you do decide to retire, you will be able to take 25% of the then value of the new pension fund. No more cash would be paid for the existing fund even if it has gone up in value.

As for the tax position on taking the income payments, this is neutral as you would pay tax on the income from the pension fund under PAYE and then get relief on the pension contribution you pay as this has basic rate tax automatically deducted – you pay the net premium. You will, of course, have to claim higher rate tax if applicable through your tax return.

But beware, although Inland Revenue do allow this action, they are not so keen on lump sums being made once you have matured a pension plan and, needless to say, introduced new legislation to prevent, what they call, “the recycling of tax free cash”

Lastly on the question of tax relief, don’t forget if you are a member of a Group Personal Pension Plan and pay higher rate tax, you have to claim this back from Inland Revenue as it is not done automatically. I am amazed by how many people are not doing this!

It is clear, once again, the importance of speaking to a qualified IFA and reviewing your pension arrangements.

This article was written by Langtons - Published in the Western Morning News, Money, 11th September 2008