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| Countdown to Pension ‘A Day’ (6th April 2006) |
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TaxationWeb by Bob Fraser MBA MA FSFA Bob Fraser, MBE, MBA, MA, of Rensburg Investment Management Ltd, points out the importance of pensions and some of the main features of the forthcoming new pension regime We are now within 12 months of the fundamental changes to the UK pension legislation.To reaffirm why pensions are so important to each of us, the table below, based on recent mortality tables, shows the ages beyond which 50 per cent and 25 per cent of male and female annuitants aged 65 can expect to live: MalePopulation life expectancy – 84Age beyond which 50% could live – 86 Age beyond which 25% could live – 92 FemalePopulation life expectancy – 87Age beyond which 50% could live – 89 Age beyond which 25% could live – 95 These numbers may seem unbelievable, especially the higher ones, but the spring 2005 edition of Population Trends from National Statistics shows that there are more than 1.1 miliion people aged 85 or over in the UK, an increase of more than 100 per cent since 1976. Roughly 400,000 of these are aged 90 or over – an increase of more than 170 per cent since 1976. Our pension will therefore have to support many of us for much longer than was anticipated when funding commenced. The following is a reminder of some of the key facts that you need to know in the run-up to A-Day. Statutory Lifetime AllowanceThe Statutory Lifetime Allowance (SLA) for the tax-years 2006/2007 to 2010/2011 will be:Tax Year2006/07 - £1,500,0002007/08 - £1,600,000 2008/09 - £1,650,000 2009/10 - £1,750,000 2010/11 - £1,800,000 In certain circumstances, it will not be obvious if a member’s benefits exceeds the SLA, for example if they are members of a final salary scheme. The Finance Act 2004 set out how these benefits should be tested against the SLA. If you require details please get in touch with your usual IFA, or contact me. ContributionsAnnual allowance for the tax years 2006/2007 to 2010/2011 will be:Tax Year2006/07 - £215,0002007/08 - £225,000 2008/09 - £235,000 2009/10 - £245,000 2010/11 - £255,000 If contributions exceed the annual allowance then the member will be subject to a 40 per cent tax charge on the excess. For final salary schemes, an excess will occur if member’s benefits increase in value by more than the annual allowance applicable. Member ContributionsThe higher of £3,600 and 100 per cent of earnings can receive tax relief subject to an overall maximum of the annual allowance.Employer ContributionsThere is no maximum contribution. Employers will receive 100 per cent tax relief on the whole contribution. If the contribution exceeds the annual allowance the scheme member will be liable to a 40 per cent tax charge on the amount exceeding the annual allowance.ConcurrencyAnyone will be able to join any type and any number of registered pension schemes at the same time.InvestmentsThere will be one set of investment rules for all pension schemes. There will no longer be a schedule of ‘permitted investments’.Scheme BorrowingLimited to 50 per cent of the market value of scheme assets.Loans to the EmployerUp to 50 per cent of the market value of the scheme with a maximum term of 5 years.PropertyInvestments in property, including residential, will be allowed.Shares in the Sponsoring EmployerWill be limited to 5 per cent of the scheme assets.Connected Party RulesThere is no longer any restriction on members interacting with the scheme, but any asset used by a member or an associate of the member on a non-commercial basis will be treated as a benefit in kind.Investments held before A-DayThese are not affected by the new rules.Minimum/Maximum Pension AgesFrom A-Day to April 2010 the minimum retirement age will be 50. From 2010 that minimum age will increase to 55. Benefits on the grounds of ill-health can be taken earlier.ProtectionThere are two ways in which individuals can protect their fund if they are or believe they may be affected by the statutory lifetime allowance. These are known as primary and enhanced.1. Primary• Benefits must be within HM Revenue & Customs limits before A-Day.• Benefits value must be over £1,500,000 on A-Day. • Must be registered with the Inland Revenue by April 2009. • Member can continue to accrue benefits within limits after A-Day. • Lifetime Allowance Charge (LAC) may still be due if benefits value exceeds personal lifetime allowance. 2. Enhanced• Benefits must be within HM Revenue & Customs limits before A-Day.• Any amount can be protected with no possibility of a LAC. • Must be registered with the Inland Revenue by April 2009. • Member must stop accruing benefits before A-Day. • Can revert to primary protection if contributions made (if also registered for primary protection). Retirement Benefits - Tax-Free Cash (TFC)The maximum amount of TFC will be 25 per cent of the benefits value of all schemes. There are special arrangements for members with an entitlement to more than 25 per cent of the benefits value, or £375,000 TFC on A-Day.Income Benefit on RetirementSecured PensionLifetime annuity – money purchase schemes only.Scheme pension – defined benefits (final salary) schemes can only provide a scheme pension. Scheme pension available for money purchase schemes as well. Unsecured PensionSimilar to current income drawdown.Can be used up to age 75. Maximum amount 120 per cent of the annual income payable from a single life, level annuity. There is no minimum amount, but this will be subject to Department of Work and Pensions (DWP) requirements. Income levels must be reviewed every 5 years. Alternatively Secured PensionMaximum amount 70 per cent of the annual income payable from a single life, level annuity at age 75. There is no minimum amount, but this will be subject to DWP requirements.Income levels must be reviewed every year. Pensions and DivorceThe pension credit will count towards the recipient’s Statutory Lifetime Allowance.Pension credits do not count towards the annual allowance. If there is an existing pension sharing order in force at A-Day, pension credits can be ignored when calculating pre A-Day rights. July 2005 Bob Fraser, MBA, MA, FSFA Associate Investment Director Rensburg Investment Management Limited e-mail your enquiry (NOTE: potential clients only) Bob Fraser is an associate investment director and has achieved the highest level of professional advisory qualifications in the financial services industry. He is a Fellow by examination of Personal Finance Society, which is a specialist faculty of the Chartered Insurance Institute. He also holds a Masters of Business Administration degree. Rensburg Investment Management is the largest company in the Rensburg group and a subsidiary of Rensburg plc, a public company whose shares are quoted on the London Stock Exchange. Its core business is investment management and it currently looks after around £3.0bn of funds for private investors, trustees, charities and pension funds. It provides independent financial planning advice and investment management services to both individuals and businesses in order to meet their financial objectives. Financial planning is the process by which resources and risks are firstly identified and then used or provided for in a way which best achieves financial goals and lifestyle. It provides detailed advice to clients across the whole range of financial planning issues from the provision of straightforward life assurance, to savings and retirement planning, to complex inheritance tax planning arrangements. Rensburg is authorised and regulated by the Financial Services Authority (FSA) whose function is to provide investor protection through the regulation of financial product providers in securities and derivatives business.
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Saturday, 30 July 2005 | 11737 Hits |
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