Recent UK Pension Changes ‘at a glance’

Contributed by SIPP Specialists Limited [www.sippspecialists.co.im]

We thought that this month it might be useful for those companies with UK clients/contacts to summarise the important and far reaching changes to the UK Pension rules that were effective from 6th April 2011. These are summarised below.

Annual Allowance

The Annual Allowance reduced on 6th April 2011 from £255,000 to £50,000. Full tax relief will continue to be received at the person’s highest marginal tax rate. So for a high earner paying 50% tax on more than £50,000, the net cost to them of a £50,000 pension contribution will be £25,000. The Annual Allowance is the total of any personal and company contributions made to ALL Registered Pension Schemes in the year.

Carry forward of unused Annual Allowances

From 6th April 2011 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 £40,000 in 2009/10 and £50,000 in 2010/11, they could make a contribution of £60,000 in 2011/12 and get full tax relief on the £60,000.

New drawdown rules

From 6th April 2011, the maximum amount that can be taken before age 75 reduced from 120% of GAD to 100% of GAD – in this context “GAD” refers to tables produced by the Government Actuary’s Department that broadly equate to what someone would get if they bought an annuity. GAD rates are dependent on sex, age and 15 year gilt yields. The minimum amount that can be taken remains at zero, so each year the member can choose what level of pension to take, between nothing and 100% of GAD.

Prior to 6th April 2011 different rules applied post age 75. However, from 6th April 2011 the same rules will apply both pre- and post-age 75. So from 6th April 2011 those who are over age 75 can draw between nothing and 100% of GAD each year. This means that there is no longer any need for someone to start to commence to receive benefits before age 75.

These new rules apply from the first Pension Review date on or after 6th April 2011. So if someone last had their pension reviewed as at 1st June 2010, they can continue to draw 120% of the June 2010 GAD rate until 1st June 2015 (or their 75th birthday if earlier). At that next review the 100% limit will apply. From 6th April 2011 pension reviews will have to be every 3 years, rather than every 5 years, up to age 75. They will continue to have to be annually from age 75.

There are also changes to GAD rates from 6th April 2011. New GAD rates apply to all reviews done on or after 6th June 2011. For reviews done between 6th April 2011 and 5th June 2011 either the old or the new GAD tables can be used. Full details of GAD tables and their use are at:

http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm

New unisex GAD tables are due to be introduced effective from December 2012, to meet European legislation.

There is another change effective from 6th April 2011. Provided someone has “guaranteed pension income” of at least £20,000 per year for life, they can in any year withdraw as much from their pension scheme as they want – although of course any drawings are subject to their marginal rate of income tax. In this context “guaranteed pension income” is essentially state pension income plus income from an annuity purchased from an insurance company.

Death before drawing any benefits

If someone dies not having taken any benefits i.e. not having taken either a tax free lump sum and/or income drawdown, then:

a. If they are aged under 75, the whole of their fund is paid out tax free under discretionary trust
b. If they over age 75, either:

i. The whole of their fund is first used to provide income drawdown to the surviving spouse and/or any other financial dependants. On their subsequent death, the remaining fund is subject to tax at 55%, with the remaining 45% being paid out as a lump sum under discretionary trust, OR

ii. on the death of the member the whole of their fund can be paid out as a lump sum, but tax of 55% will be payable.

Death in drawdown

c. There are also changes that were effective from 6th April 2011 as to what happens on death in drawdown. If someone in drawdown dies (before or after age 75) either:

i. the whole of their fund is first used to provide income drawdown to the surviving spouse and/or any other financial dependants. On their subsequent death, the remaining fund is subject to tax at 55%, with the remaining 45% being paid out as a lump sum under discretionary trust, OR

ii. on the death of the member the whole of their fund can be paid out as a lump sum, but tax of 55% will be payable.

Note that if a lump sum on death is paid out to a registered charity, the tax is reduced to zero.

Here’s another very important change effective 6th April 2012:

Lifetime Allowance (LTA) and Fixed Protection

This will reduce from £1.8M to £1.5M from 6th April 2012. However, the Government says that it “intends to design a protection regime that supports those individuals who have already made pension savings decisions based on the current level of the LTA”. It will be called “Fixed Protection”. Details of how this Fixed Protection can be applied for are to follow but they make all the right noises about ensuring that those who currently have more than £1.5M (and less than £1.8M) together with those who previously elected for Primary or Enhanced Protection will not be fiscally penalised by the reduction in the LTA.

What HMRC say on their website is that “to keep fixed protection someone:

• cannot start a new arrangement other than to accept a transfer of existing pension rights
• cannot have benefit accrual
• will be subject to restrictions on where and how they can transfer benefits”

No doubt all will become clear in due course. HMRC do not give any indication as to when the relevant Fixed Protection application forms will become available.

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.

To contact SIPP Specialists email consultants@sippspecialists.co.im or visit their website www.sippspecialists.co.im

SIPP Specialists Limited, St Georges Chambers, 1 Athol Street, Douglas, Isle of Man, IM1LD
Tel: 0044 (0)1624 678458

SIPP Specialists Ltd is registered with the Isle of Man Insurance and Pensions Authority as a Professional Benefits Schemes Administrator

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