JUNE 2011 NEWSLETTER: UK Pension Changes = Opportunity

Contributed by MW Pensions. [www.mwpensions.co.uk]

We like to focus on opportunities for advisors. This month we discuss how some of the April 2011 changes have created opportunities for advisors to discuss with some of their clients how they might constructively benefit from the changes.

Annual Allowance and the newly introduced “carry forward” facility
The Annual Allowance reduced drastically on 6th April 2011 from £255,000 to £50,000. Whilst full tax relief will continue to be received at the person’s highest marginal tax rate, any contributions above the Annual Allowance attract a tax charge. The Annual Allowance of course includes all contributions made both by and on behalf of an individual.

However, anyone who has not used their full Annual Allowance in any tax year can “carry forward” that unused allowance for up to 3 years. So if someone makes a contribution of £40,000 in 2011/12, £50,000 in 2012/13 and £50,000 in 2013/14, they could make a contribution of £60,000 in 2014/15 and get full tax relief on the £60,000. For years prior to 2011/12 the “Annual Allowance” for this “carry forward” will be £50,000. So if someone made contributions of £10,000 in 2009/10 and £50,000 in 2010/11, they could make a contribution of £90,000 in 2011/12 and get full tax relief on the £90,000. Note that in order to qualify for “carry forward” the individual must have been a member of a Registered Pension Scheme for that year – though any contribution for carry forward does not need to be made to the same Registered Pension Scheme of which the individual was a member in the previous year.

It must always be remember that, in order to obtain full tax relief, any personal contributions are limited to 100% of an individual’s UK earnings and any company contributions are subject to HMRC’s “wholly and exclusively” rules for corporation tax relief purposes.

With the harsh economic situation since the banking crisis, many individuals have had to significantly reduce their pension contributions in the last year or two. Carry forward is a way whereby they may be able to pay in significantly more than £50,000 a year post 6.4.11. Many advisors are likely to have clients who would potentially benefit from this new option..

Death benefit options
The tax payable on any lump sum payments made following death in drawdown rose on 6th April 2011 from 35% to 55%. However, if the lump sum is paid to a charity, the rate of tax is zero i.e. the full amount is paid out to the charity. The member must pre-nominate in writing to the trustees of their SIPP/SSAS their desire that a certain sum be paid out on their death to one or more charities and must also pre-nominate their chosen charity/charities. For example they might indicate to the trustees that their wish is that, on their death, 50% of the remaining fund is used to provide income drawdown to their spouse. 30% is paid out as a lump sum to charity A and 20% to charity B. Remember though that the member’s wishes are not binding on the trustees, as it is the trustees themselves who ultimately decide how death benefits should be distributed (as UK pension schemes are set up under discretionary trusts).

Many people make provisions in their will for payments to be made to charity. This new 55% tax rate may mean that some people should review their will and IHT planning – it may be more tax efficient for charitable payments on death to come from their pension assets rather than their Estate.

This is therefore an opportunity for advisors to review IHT and other death planning with some of their clients.

Scheme pension
The reduction in the maximum drawdown income to 100% of GAD may mean that some people would benefit from a higher income level if they opted for a Scheme Pension. Normally this will only be the case if they are in ill-health and in particular have a life shortening illness.

We have seen some articles suggesting that people in normal health could benefit from a significant increase in income by opting for a Scheme Pension. We fail to see how this can be, given that the 100% GAD figure is essentially the equivalent of a current annuity rate. Surely the actuary who is determining the level of Scheme pension would be hard pushed to use anything other than the same mortality assumptions that underline the GAD rates?

However, for those in ill-health who wish to maximise income drawdown, a Scheme Pension option might be worth looking at – another opportunity for advisors.

Gilt Yield for Drawdown
The gilt yields to be used for drawdown calculations are:

We do not give financial advice and no comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.

This Newsletter is intended for professional advisors only, not members of the general public

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