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Proposed Changes to Pensions Legislation

Author: Jo Summers (jsummers@pwtadvice.co.uk) - 22/12/2010

The draft Finance Bill was issued on 9 December 2010. Royal Assent is not expected until July 2011, so it is possible the laws summarised below may change before they are enacted. Comments on the draft legislation are invited before 9 February 2011.

Summary of the changes

- A reduced annual allowance will have effect from 2011/12
- A reduced lifetime allowance will apply from 6 April 2012
- There will be no requirement to take a lump sum or ‘annuitise’ by age 75
- A new concept of ‘capped drawdown’ will apply from age 55
- A 55% ‘recovery charge’ will apply to lump sums post-75 or from drawdown funds

Annual Allowance

The current annual allowance is £255,000 but this will be reduced to £50,000. This limit will apply to all Pension Input Periods ending in 2011/12 but with transitional rules from 14 October 2010.

The annual allowance charge (for contributions in excess of the annual allowance) will be linked to the individual’s marginal tax rate.

Any unused annual allowance can be carried forward for up to three years as long as the individual was a member of a registered pension scheme in that period (regardless of whether s/he actually contributed in those years).

The annual allowance does not apply for the tax year in which an individual dies. From 2011-12 onwards, the annual allowance charge will apply in the year pension benefits are drawn except where the benefits are in the form of a serious ill health lump sum. This is where the member either is not expected to live more than 12 months or will not be able to undertake gainful work in any capacity at any time in the future (otherwise than to an insignificant extent). The charge will also apply to those who have enhanced protection.

Inflation-linked increases in pensions for deferred members will not count towards the annual allowance test.
Reduction of lifetime allowance
The current lifetime allowance (‘LTA’) is £1.8 million but, from 6 April 2012, it will be reduced to £1.5 million until further notice.

A new “fixed protection” regime will permit members to retain the LTA of £1.8m on condition that they no longer contribute to their pension or accrue pension benefits. Application for this protection must be made before 6 April 2012.

Individuals who are already entitled to primary protection and/or enhanced protection will continue to receive their current levels of protection.

Removing the Requirement to Annuitise by Age 75

From 6 April 2011, both unsecured pensions (USPs) and Alternatively Secured Pensions (ASPs) will be replaced by a new system of ‘capped drawdown’. This will be available from age 55 but with no upper age limit. This removes the requirement for members to buy an annuity by age 75.

The minimum income will be nil (at all ages) and the maximum will be capped at 100% of the equivalent annuity (GAD rate). Income reviews will be required at least every three years until the end of the year in which the member reaches age 75. Post age 75, reviews must be carried out annually.

There will be no requirement to take a Pension Commencement Lump Sum (PCLS) by 75.

A new concept of Flexible Drawdown will apply where members have Minimum Income Requirement (MIR) of at least £20,000 a year; they will be able to access the whole of their pension as income without limit. Once in Flexible Drawdown the annual allowance charge will apply to any further funds contributed.

Individuals taking funds under Flexible Drawdown, whilst resident outside the UK for less than five full tax years, will be liable for UK income tax in the tax year when they become UK resident again.

The ‘recovery charge’ of 55% will apply to lump sum death benefits paid from drawdown funds. The same charge will apply after age 75 on all lump sum death benefits, irrespective of whether the pension was in drawdown, unless donated to charity. Death benefits for those who die before age 75 without having taken a pension will remain tax-free.

The changes above will also apply to members of non-UK pension schemes who have received either tax relief on contributions or funds transferred from registered pension schemes, such as QROPS.

Inheritance tax charges will no longer apply to drawdown pension funds, even when the individual dies after reaching the age of 75. This means the maximum tax rate on ‘unused’ pension funds will be 55% rather than 82%.

With effect from 6 April 2011, anti-avoidance charges that apply where a member omits to take retirement entitlements will be removed. If the pension scheme trustees have no discretion on paying out a lump sum after the death of scheme member (i.e. where amounts must be paid to their estate), this will remain subject to IHT. IHT will also continue to apply to all other lump sums (i.e. those in a non-Registered Pension Scheme or non-QNUPS).

Other changes

The multiple used to calculate the value of defined benefits pension savings will increase from 10 to 16.

PWT Advice LLP
22 December 2010

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Please Note:
These articles were based on the legislation in force at the date of publication. The laws may well have changed since. These articles should not be taken as being or replacing proper legal advice.

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