Guide to changes in pension legislation (2011)

A Guide to Changes in Pension Legislation 2011

Wealth Matters Ltd 727 Capability Green, Luton, Bedfordshire, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 Email: info@wealth-matters.co.uk

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CHANGES IN PENSION LEGISLATION FROM APRIL 2011

1. Foreword If you are saving for your retirement using a Self Invested Personal Pension (SIPP) or already taking benefits from one, it is important that you understand the changes in pension legislation that were introduced with effect from 6 April 2011. Although the changes were suggested prior to The Budget of 23rd March 2011 and then came into force on 6th April 2011, they only became law when The Finance (No. 3) Bill 2010-­‐11 gained Royal Assent on 19 July and became the Finance Act 2011.

After reading this guide, you should have a clearer understanding of how much you can tax-­‐efficiently contribute to a pension and the rules governing how you can take retirement benefits from your pension fund in the future; the earliest being at age 55.

Whether you are paying net (personal) contributions or gross (employer) contributions or both, a pension wrapper is still one of the the most tax-­‐efficient ways to save for the retirement. Retirement planning is about replacing your income at a point in the future so that you can decide whether to work or not.

In order to give yourself the highest potential of reaching your retirement goal and becoming financially independent at a chosen point in the future, we recommend that you obtain independent financial advice subsequent to reading this guide. Wealth Matters can help you to formulate a bespoke strategy and guide you on the path to financial freedom.

2. Key changes at a glance Annual Allowance for 2011/12 changes to £50,000 (from £255,000 in 2010/11) Introduction in 2011/12 of Carry Forward of unused Annual Allowance covering the past three tax years No requirement to take benefits or ‘annuitise’ at age 75 Alternatively Secured Pension (ASP) has been removed and drawdown can now continue past age 75.

Anti-­‐Forestalling rules have been abolished (These rules restricted high earners with incomes over £130,000 per annum to contribute more than £20,000 -­‐ £30,000 to a pension plan).

Pension Commencement Lump Sum (PCLS) -­‐ the tax free lump sum -­‐ does not have to be taken before age 75 For those individuals receiving an income as unsecured pension (USP) before 6th April 2011, the new Capped Drawdown limits will take effect on particular dates (see below for further details) For those individuals who who were receiving an income under the alternatively secured pension (ASP) before 6th April 2011, the new Capped Drawdown limits came into effect from 6th April 2011.

Capped Drawdown allows you to take an income between 0-­‐100% of the calculated amount. This will be recalculated every three years on the review date applicable and annually after age 75.

‘Flexible Drawdown’ is available to those who can meet certain criteria including a Minimum Income Requirement (MIR) of £20,000 (see below for further details).

Options relating to death benefits remain relatively unchanged. However, the tax charge on lump sum death benefits is now 55% (was 35%) if you are in drawdown, of over 75 (whether you are in drawdown or not). Otherwise, if you die before taking benefits and are under age 75, it is tax free.

No Inheritance Tax (IHT) will apply to income drawdown funds (including after age 75)

CHANGES IN PENSION LEGISLATION FROM APRIL 2011

3. Changes to the Annual Allowance The Annual Allowance restricts the tax advantages of pension savings e.g. tax relief on contributions made by you and contributions made by your employer on your behalf. For the tax year 2011/12, the Annual Allowance is £50,000 (the Annual Allowance for 2010/11 was £255,000).

Introduction of ‘Carry Forward’ If your pension savings have been less than £50,000 each year over the past three years, it is possible for you to carry forward unused allowance provided you were a member of a registered pension scheme in each of the past 3 years.

Please note: 1.

2.

3.

4.

5.

6.

7.

8.

The Annual Allowance for the tax years 2008/09, 2009/10 and 2010/11, for the purposes of carry forward, is limited to £50,000 If in an intermediate year, your pension savings exceed £50,000, then any unused allowance from the previous year will be reduced accordingly.

Exemptions for those with Enhanced Protection will no longer apply Special Annual Allowance Charge (SAAC) rules introduced in the Finance Act 2009 have been repealed Current exemption to maximise benefits in the year of retirement is removed Exemptions to the AA will only apply on death, serious ill-­‐health or potentially major ill health Tax will be charged at the member’s marginal rate, rather than a blanket 40% There will be an increase in the factor used to calculate values of defined benefits from 10 to 16

For example: Here, the unused allowance is £30,000; £10,000 from 08/09 (the £10,000 excess from 09/10 is taken off the unused allowance from 08/09), nil from 09/10 plus £20,000 from 10/11 year.

It is therefore possible to invest £200,000 tax-­‐ efficiently into a pension, if you have had a registered pension scheme in the past three years but haven’t contributed to it this year or the previous 3 years.

In this example your income would have to be £200,000 per annum to claim tax relief on all of the contribution. You can claim up to 50% tax relief on all of this contribution, but your income would have to be £350,000 per annum to do so.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

CHANGES IN PENSION LEGISLATION FROM APRIL 2011

4. Taking benefits from your SIPP Having built up a retirement fund within your SIPP you will at some point wish to take an income from it. There are a number of ways of doing this including: 1.

2.

3.

Taking a proportion of your fund (normally up to 25%) as a tax free lump sum, and either: Using your remaining fund to buy an annuity from a life insurance company of your choice which will then pay you a regular income, or Drawing down a proportion of your remaining fund each year as an income (income drawdown)

The changes mainly affect the third option. In particular the level of income you will be able to take each year.

This method of drawing income is referred to as ‘Capped Drawdown.’ If you can satisfy certain criteria (see section 6 below) you may elect for an alternative, termed ‘Flexible Drawdown.’

The maximum level of income that can be taken from your pension fund in any one year is calculated using a set of actuarial tables provided by the Government Actuary’s Department (GAD). Under Capped Drawdown, the maximum is 100% of the calculated figure from these tables.

The GAD tables are found on HMRCʼs website: www.hmrc.gov.uk/pensionschemes/gad-tables.htm The rates used in the GAD tables are based on 15-year gilt yields on the 15th of the month before the date income withdrawal begins (known as the ʻinitial reference dateʼ), rounded down to the lower 0.25%. Your age and your gender also affect the rate you will get.

HMRC base the income drawdown limits on the equivalent annuity that could be bought from the available fund. The GAD tables therefore show the amount of relevant yearly annuity that can be provided for every £1,000 of purchase price, depending on age, gender and the appropriate rounded gilt rate.

The same rates apply for protected rights and non–protected rights. The annuity is assumed to be: level, with no guarantee, single life. This amount is called the ʻbasis amountʼ.

In the past, maximum income based on 120% of the calculated figure from these tables was available to certain individuals and depending on your circumstances you may be able to access this higher maximum for a limited period. This means that in some circumstances your maximum allowable pension may decrease and in others it may increase.

If you meet the necessary criteria, you may decide to elect to take income under Flexible Drawdown. There is no restriction on the amount of income you can take through Flexible Drawdown, subject to a maximum of 100% of your remaining fund. Flexible Drawdown payments like Capped Drawdown payments are treated as income so you will be taxed at your marginal rate of tax.

Other important changes include ending the requirement to take a tax free lump sum and/or commence drawdown or buy an annuity by age 75.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

CHANGES IN PENSION LEGISLATION FROM APRIL 2011

5. Capped Drawdown Income Reviews Reviews of the income limits are now required every three years up to age 75. Prior to 6 April 2011 a review was required every five years, because of transitional measures included in the legislation. The first review after 5 April 2011 may, in certain circumstances, takes place more than three years in the future (see below for more details).

After age 75, the review will be undertaken every year with the minimum income allowable being zero.

For those subject to the transitional measures referred to above, the Capped Drawdown limits apply on the earlier of one of the following dates: The next 5 year review The anniversary date following your 75th birthday, or On the next anniversary date following a transfer to a new drawdown arrangement.

However, you can elect for us to review your income limit at any anniversary date prior to the 5 year review, at which point the new Capped Drawdown limits will apply.

Those individuals in ASP before 6 April 2011, came under the Capped Drawdown limits from 6 April 2011. In the case of individuals who attained age 75 on or after 22 June 2010, and continued to take income through USP, the Capped Drawdown limits apply from the anniversary date immediately following 5 April 2011. If you were in ASP before 6 April 2011, please note that Wealth Matters will not have automatically changed your current income levels when converting you to Capped Drawdown. If you wish to change your income, please contact us.

New Government Actuarial Department (GAD) annuity tables for Capped Drawdown New GAD tables have been produced for the calculation of Capped Drawdown with rates extending beyond age 75 up to age 85. However, for ages up to 75, the rates are lower in most cases than those in the previous GAD tables. Maximum income levels will be calculated using these tables for all reviews carried out from 6 June 2011.

Pension Commencement Lump Sum (PCLS) There are no changes to the calculation for the PCLS (normally up to 25% of your pension fund). However, there is no longer an upper age by when this lump sum must be taken. Therefore, you can continue to take up to 25% of your pension fund as tax free cash.

If you are not drawing all of your retirement benefits you can take a PCLS provided necessary conditions are met.

For more information on these conditions please speak to Wealth Matters on 01582 720511.

Standard Lifetime Allowance The Standard Lifetime Allowance for the value of your pension rights is reducing from £1.8 million to £1.5 million as of 6 April 2012. In the event that you defer taking your benefits until after age 75, a Lifetime Allowance check will still have to be carried out at age 75.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

CHANGES IN PENSION LEGISLATION FROM APRIL 2011

6. Flexible Drawdown Provided you can meet certain requirements, you may decide to opt for Flexible Drawdown, where it is possible to draw unlimited income from your funds, subject to a limit of 100% of the residual value.

What are the requirements?

You will need to meet the normal requirements to start taking income withdrawals from your pension such as having reached a minimum age of 55 and you must also satisfy the conditions for Flexible Drawdown including: 1) You have a minimum level of annual income called the Minimum Income Requirement (MIR) of £20,000 per tax year at the time you make the declaration. Relevant income that can be included in MIR are: Payments of a lifetime annuity from a registered pension scheme In certain circumstances, payments of a ‘scheme pension’ from a registered pension scheme. For more information on the circumstances under which such payments can be included please speak to your financial adviser.

Payments under an overseas pension scheme which, if the scheme were a registered pension scheme, would fall within one of the above categories Payments of social security pension (also referred to as State Pension) The above pension or annuity will not count as relevant income towards the MIR unless your have, at the time of making the declaration, already received a payment from that pension or annuity.

Relevant income towards the MIR does not include drawdown pensions Payments you receive under a dependant’s annuity or, in some circumstances, a dependant’s scheme pension from a registered pension scheme, or an overseas equivalent, count as relevant income 2) No contributions are paid by you or on your behalf in the tax year in which the declaration is made to any money purchase registered pension scheme other than a cash balance scheme.

3) At the time of the declaration you are not an active member of a Defined Benefits or cash balance registered pension scheme.

To confirm that you meet the Flexible Drawdown conditions you will be required to make a valid declaration to the Scheme Administrator.

Other important points: This valid declaration must comply with regulations made by HM Revenue & Customs.

You cannot take Flexible Drawdown from any Protected Rights fund you have built up through contracting out of the State Second Pension (previously the State Earnings Related Pension Scheme).

Once you have taken Flexible Drawdown, any new pension savings you may make in future tax years will be liable to an annual allowance charge, which effectively cancels out any tax advantages of such savings.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

CHANGES IN PENSION LEGISLATION FROM APRIL 2011

7. Taxation and Death Benefits How will income withdrawals under Flexible Drawdown be taxed?

Income payments made under Flexible Drawdown are subject to Income Tax deducted at source and taxed at your marginal rate.

If you take Flexible Drawdown and it turns out that you do not meet the above requirements, any income taken in excess of the normal maximum under Capped Drawdown will be treated as an unauthorised payment and be subject to additional tax charges.

Tax on lump sum death benefits Under age 75: There will be no change for those who have not taken any benefits. Therefore, any lump sum death benefit will be paid free of tax, provided it is paid within two years.

Age 75 or over: For those who have not taken any benefits, there will be a tax charge of 55%.

Capped and Flexible Drawdown: For those elements of your fund in Drawdown, lump sum death benefits will be taxed at 55% (this was previously 35%). This rate applies at all ages both pre and post age 75.

Unused drawdown pension funds of a member who dies with no living dependants may be donated to charity tax free

Inheritance Tax changes:

No IHT will apply to income drawdown funds (including after age 75) IHT anti-­‐avoidance charges will be removed if the charges apply to registered pension schemes and qualifying non UK pension schemes where the individual omits to take their annuity IHT charges which may arise where pension scheme trustees have no discretion with regards to the paying of lump sums after the individual’s death (i.e. where amounts must be paid to their estate) will remain subject to IHT IHT will continue to apply to all other lump sums (i.e. those in a non-­‐registered pension scheme).

N.B. This guide is issued in connection with products and services provided by Wealth Matters Limited. The contents of this guide should not be constituted as advice. Wealth Matters Limited does not accept any liability if the information provided in this document is used for any other purpose. This guide is based on our understanding of current UK legislation and HMRC practice at the date this document was produced.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

CHANGES IN PENSION LEGISLATION FROM APRIL 2011

8. Further changes & Comparison Advance Notice of further changes coming into effect in April 2012: Money purchase contracting out (including via a personal pension) is to cease – so there will be no more Protected Rights / Non Protected Rights differentiation.

The Lifetime Allowance will be reducing to £1.5m (from £1.8m).

New “transitional protection” will be introduced for existing clients with funds between £1.5m and £1.8m who would be caught by the reduction in the Lifetime Allowance.

Changes to triviality – current triviality is allowed if the aggregate value of a personʼs pension fund (s) (excluding State pensions) is less than 1% of the Lifetime Allowance. Since the Lifetime Allowance is to reduce, the triviality limit will become a fixed monetary limit of £18,000.

Income Drawdown -­‐ Comparison with previous rules

We always aim to keep things simple, but should you have any questions relating to any section in this document, please feel free to contact your financial planner at Wealth Matters as per the details below.

N.B. This guide is issued in connection with products and services provided by Wealth Matters Limited. The contents of this guide should not be constituted as advice. Wealth Matters Limited does not accept any liability if the information provided in this document is used for any other purpose. This guide is based on our understanding of current UK legislation and HMRC practice at the date this document was produced.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk