-- The Finance Bill 2011 and other changes --


One year annuity deferral could take 24 years to recover
One year annuity deferral could take 24 years to recover

It's time to scrap pensions in favour of savings
It's time to scrap pensions in favour of savings

Pension Income reduced by Quantitative Easing
Pension Income reduced by Quantitative Easing

How to carry forward and Intervening tax years
How to carry forward and Intervening tax years


Following the recent announcements, one thing is clear – the need for pension advice, particularly those approaching retirement, has never been greater. Please find below a summary of the Finance Bill 2011:-

Annuitisation consultation

• No requirement to annuitise at any time.
• Current income drawdown is to be replaced by ‘capped drawdown’ with GAD limits reduced to 100%.
• A new ‘flexible drawdown’ will allow income to be taken with no limit (effectively allowing the whole fund to be stripped out). This is on the basis that the individual can meet a ‘Minimum Income Requirement’ of £20,000 a year accumulated from other pensions (including basic state pensions, and scheme pension/dependants pensions).
• Once an individual has elected for ‘flexible drawdown’ then any subsequent pension contributions to a registered pension scheme will be subject to an annual allowance charge on any pension input amounts.
• Any lump sum payable on death whilst in income drawdown is subject to a 55% tax charge (i.e. increased from the current 35%). This will also apply on death after age 75 (where individuals currently in Alternatively Secured Pension (ASP) and potentially subject
to an 82% tax charge, will fall into line). However those individuals who die before age 75 without taking a pension will continue to be entitled to a lump sum free of this tax charge, whilst all individuals who die without dependants will have the option of nominating that
a lump sum be paid to a registered charity – with no tax charge.
• Reviews will revert back to one every 3 years (as with pre ‘A’ day regulation) although, on reaching age 75, this will change to yearly reviews. For income drawdown arrangements made before April 2011 the altered withdrawal limits will have effect for individuals whose 75th birthday is or was:

– on or after 6 April 2011. This is from the start of their next reference period to begin on or after that date
– before 6 April 2011. This is from the start of the drawdown pension year in which 6 April 2011 falls.

On 9 December 2010 the Government announced it’s findings following the recent age 75 consultation. On the same day, the Government also confirmed details of tax relief changes, based on the summary of changes and draft legislation published on 14 October 2010 and covered in one of our recent blogs.

This blog outlines the key points, in addition to a number of other key areas which may impact your clients approaching or at retirement.

Changes to Inheritance Tax (IHT) mean:

• 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 (ie 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).

Tax relief changes

Please see the summary below:

• annual allowance reduced to £50,000 from April 2011
• annual allowance charge linked to the individual’s marginal rate of tax
• the option to carry forward any unused annual allowance for three years (starting with 2008/9 tax year)
• an increase in the factor used to calculate values of defined benefits from 10 to 16
• exemptions to the annual allowance rules in the year of death, or where the individual suffers severe ill-health
• transitional rules which catch those individuals with pension savings based on pension input periods which started before 14 October 2010 and end after April 2011
• inflation-linked increases in expected pensions for deferred members of schemes will not count towards the annual allowance charge
• confirming that the lifetime allowance will be reduce from £1.8m to £1.5m from April 2012.

Further detail was provided in relation to the lifetime allowance:

• A new form of protection (‘fixed protection’) up to £1.8m will be available to individuals whose pensions savings either already exceed £1.5m, or are likely to exceed that figure, at the time benefits are taken. For defined benefit schemes this means anyone entitled to a
pension of £75,000 or more a year or, where the scheme provides a separate lump sum, (typically three times annual pension), a pension of round £65,000 a year.
• An application needs to be made to HMRC before 6 April 2012 – a result of which is that pension contributions must cease.
• Anyone with existing primary or enhanced protection arising from ‘A’ day, will continue to be unaffected.

State Pension Age (SPA) changes

The Government has published details on how the increase in SPA will be phased in. In summary, SPA for women will increase to 65 by November 2018, then both men and women will see SPA increase to age 66 phased in between December 2018 and April 2020
(based on three months increase in SPA every four months).

Early access to tax-free cash sums

The Government has published its call for evidence on early access to pensions.
They have identified four main options for allowing more flexible access to private pensions before age 55. These are:
• a loan model (allowing individuals to borrow from their pension fund)
• a permanent withdrawal model (allowing access to funds without repayment possibly in limited circumstances e.g. hardship)
• early access to the 25% tax-free lump sum
• a feeder-fund model (to create a more flexible savings products linking products such as
ISAs and pension savings in a single account).

The Government has also asked for evidence on whether there’s a case for introducing further flexibility in the trivial commutation rules and on the barriers to transferring small pension pots (and proposals on how to remove).

Other updates which may be of interest

Automatic enrolment and National Employment Savings Trust (NEST)

NEST has recently confirmed that it will charge 0.3% annually on member’s funds under NEST management and 1.8% on new contributions.
HM Treasury has issued a discussion paper on “options to meet the high annual allowance charges from pension benefits” resulting from the April 2011 changes. This includes the possibility of paying any annual allowance charges from one or more pension schemes to
which an individual is a member, either in ‘real time’ or deferred until benefits are crystallised (as opposed to payment from the individual’s own funds).

These options will be of most interest to clients in defined benefit Schemes who potentially have less control over excess contributions e.g. high earners with large pay increase or promotions.

Abolition of contracting out for money purchase schemes


The Government has published its response to the consultation on the abolition of contracting out, scheduled for April 2012. One key area where they have listened to industry feedback is the about-turn on allowing transfers out from contracted-out defined benefit
schemes to money purchase schemes. This will now be permitted after 5 April 2012, provided members are made aware of the consequences of such a transfer.

For bespoke pension advice contact Credencis.

We are situated near to Derby, Leicester, and Nottingham but visit clients nationwide.

Credencis

"Live for today, Invest for tomorrow"

Views expressed by our author, are the personal views of the author alone, and are not intended in anyway to be construed as advice.They should only be used as guidance and are not necessarily suited to the personal circumstances of every individual in the UK.If you are interested in seeking advice further then please contact Credencis direct.