Pension Simplification
The Chancellor announced in the Budget on 17 March 2004 that the tax simplification proposals from the Inland Revenue would be implemented from 6th April 2006. This has created a single universal regime to replace the current eight tax regimes and the changes will affect savers in occupational and personal pension schemes, employers and financial advisers.
Pension simplification has introduced two new controls, the pension lifetime allowance and pension annual allowance replacing all eight current tax regimes with their numerous controls.
The other main changes will be to allow all schemes to offer a tax free cash of up to 25%, to allow employees the opportunity to continue working for their employer while taking benefits from their occupational pension scheme, pensions schemes are to be allowed to invest in many types of investments and the complex approval process for pension schemes will be replaced with a simplified registration procedure.
Lifetime allowance
A lifetime allowance is the maximum amount of pension savings that can benefit from tax relief and has been initially set at £1.5 million. This figure will rise over time and the proposed amounts are as follows:
- 2007 - 1.60 million
- 2008 - 1.65 million
- 2009 - 1.75 million
- 2010 - 1.80 million
In his budget the Chancellor of the Exchequer announced that the lifetime allowance would be frozen at 1.80 million for the 5 years following 2010
There is a lifetime allowance charge of 25% on pension funds that exceed the lifetime allowance. Funds that exceed the lifetime allowance can be taken as a lump sum and in this case the lifetime allowance charge would be at 55%. To value the capital value of a defined contribution scheme a valuation factor of 20:1 for pension's benefits received after 5 April 2006.
If you need advice with regards to your pension benefits and the lifetime allowance, it is very important you receive advice as soon as possible. Please contact us if you would like us to provide this advice
Annual allowance
The annual allowance was initially set at £215,000 and this figure will rise regularly as shown below until 2010 when the figure will be £255,000 for payments to a defined contribution scheme or as accrued benefits within a defined benefit scheme. The limit will not apply in the actual year of retirement.
- 2007 - 225,000
- 2008 - 235,000
- 2009 - 245,000
- 2010 - 255,000
The limit for contributions based on fractions of capped earnings is to be replaced to allow individuals to make unlimited contributions. However, tax relief on the contributions is to be limited to the higher of 100% of relevant earnings or where tax relief is given at source, limited to £3,600 where it is a personal contribution. Where funding exceeds the annual allowance an annual allowance charge of 40% is levied on the excess in contributions.
For contributions from an employer, for example contributions to a Directors pension arrangement the rules are not clear and you should seek independent financial advice.
