News/Events

Negotiationg the pensions 'simplification' minefield [22nd October 07]

Although I would have liked to have commented on the recent CGT changes being proposed by the Government, I felt it best not to as it seems to have created a rather unexpected cast of winners and losers. Maybe there will be some fine tuning – a nice way to say a U-turn as Politicians have never very well understood the art of unintended consequences!

So, I thought I would highlight the main points of another minefield called inappropriately ‘Pensions Simplification’ now we are 18 months on:-

Lifetime allowance: A lifetime cap on the maximum value of a tax-free retirement fund and in this tax year it is £1.6m which increases to £1.8m by 2010. Any amount over the cap will be taxed at 25% and called the “Lifetime allowance charge”. Pension income is also subject to tax so a higher rate taxpayer who takes the whole excess fund as income would effectively pay a 55% tax rate.

Please remember that you have until April 2009 to apply for protection against the charge.

Contributions: You and your employer can invest a sum equivalent to your annual salary each year and receive full tax relief. But, there is a current maximum of £225,000 rising to £255,000 by 2010. This limit is scrapped in the year before retirement and even if you are under age 75 and have no earnings, you can still invest £2,808 this tax year (£2880 next year as the tax rate has been reduced!) which is boosted to £3,600 by tax relief.

Tax Free Cash: The maximum tax free cash is 25% of your total fund from all sources subject to a ceiling on the lifetime allowance. Some members of the old regime could get more?

Multiple pensions: You can invest into as many pension schemes as you want so if you are a member of an occupational scheme, then you can also invest into a Stakeholder or personal pension plan.

Flexible pensions: If you are over 50, then you may be able to extract your maximum tax-free lump sum without having to retire or draw an income from the remaining fund. Company schemes are not quite so straight forward.

Annuities: It is no longer compulsory to use your pension fund at age 75 to buy an annuity as you take an alternatively secured pension (ASP). This gives you an income and the fund is left invested. The ‘Bad news’ is that on death this will be heavily taxed and the schemes are being monitored by the government.

Trivial Pensions: Although savers with pension funds worth less than 1% of the annual cap e.g. £16,000 this year, you may be able to take the entire amount as a cash sum, only 25% is tax free with the balance treated as income. Also, “trivial pensions” cannot be accessed until age 60.

Retirement Age: The minimum retirement age is being increased from 50 to 55 from April 6th 2010.

Death Benefit: The maximum death benefit will be equal to the lifetime allowance.

The above does not represent advice and due to the complex nature of pension legislation and individual circumstances, expert independent advice should be sought.

Tax treatment depends on individual circumstances and tax rates, allowances and legislation are subject to change. You can see expert advice is needed so contact an IFA specialising in Pensions.

Langtons are offering a free, no obligation pension review during November, Please click here for more details.

This article was written by Langtons - Published in the Western Morning News, This is Money, 22nd October 2007