Employers, Trustees and other providers of registered pension schemes should note the changes from 6 April 2011. Some key points:-
- Annual Allowance Charge
Where the value of a Defined Benefit (DB) member's benefits increases by more than £50,000 in a tax year, or contributions in respect of a Defined Contribution (DC) member exceed the annual £50,000 Allowance, in principle the excess is subject to tax. £50,000 may sound a lot but, for instance, those in DB Schemes with long service whose pensionable pay increases significantly may be caught by the new rules.
The carry forward facility of unused £50,000 allowance for three past years (including back to 2008/2009) may assist. Those retiring on ill health or receiving enhanced pension terms on redundancy will need to consider the new rules closely.
- New Information Obligations
Although the member is responsible for inserting details of his Annual Allowance Charge in his self-assessment tax return, Trustees and Employers are also involved. Under proposed amendments to the existing HMRC Information Regulations Trustees/Employers must supply benefits statements to the member where the annual increase in value exceeds the Annual Allowance. Failure to provide information or providing incorrect information could lead to claims by members.
- Maximum value of tax favoured pension savings - the Lifetime Allowance
The Lifetime Allowance is to be reduced from April 2012 from £1.8m to £1.5m total across all an individual's registered pension arrangements. Members may elect to protect their existing £1.8m Lifetime Allowance subject to conditions being met. Trustees will need to ensure their procedures (and the procedures of their administrators) are robust enough to deal efficiently and successfully with the relevant formalities.
- DC benefits
DC pension benefits under registered pension schemes can be more flexible from 6 April 2011. Whether these flexibilities can be accessed by members depends on scheme rules and/or DC providers' documentation.
There will no longer be a requirement to buy an annuity at age 75. Drawdown up to a maximum limit is to be permitted both pre and post age 75. Maximums for income drawdown are to be specified in Government Actuary's Department tables (recently published). Lesser or nil drawdown is also permitted.
The present tax charge (in certain circumstances) of 82% on death post age 75 will no longer apply - replaced by a more modest 55% charge (deferred to the second death where the fund is used to provide a pension for the deceased's spouse).
To summarise, the new tax rules and DC benefit flexibilities will pose tests for trustees, administrators and providers. Please get in touch if you need help advice or assistance.
The 6 April 2006 changes were trailed well in advance by Finance Act 2004. In contrast, the Government is rushing through the new 2011 changes. The changes will not become law until July 2011 but are to apply retrospectively from 6 April 2011. It is none too soon to start understanding the new changes and obtaining advice, if appropriate.