The current pension rules continue to be complex and the latest changes have a massive impact on future potential pension incomes. Action needs to be considered by individuals now to ensure they do not miss important deadlines.
There is a reduced amount of “Annual Allowance” restricting maximum contributions on which tax relief can be obtained to £50,000 per year. When compared to the previous maximum of £255,000 it is clear that contributions need to be paid more regularly to achieve similar final funds. The reintroduction of carry forward unused allowances will help but planning is essential to utilise allowances that would otherwise be lost.
You also need to be aware that if they exceed the Annual Allowance, with no unused relief available, then there are hefty tax charges on these excess premiums. Even those in Final Salary schemes need to liaise with their employers and pension trustees to avoid large deemed annual “contributions” which would result in a personal income tax charge.
You need to be aware of your fund value and consider carefully before paying any contributions that would incur later tax charges. There is a reduced Lifetime Allowance restricting the overall tax efficient pension “pot” value to £1.5m (from £1.8m). Any value in excess of the cap would be subject to tax charges at the time of drawdown. Those with funds already in excess of £1.5m can protect a pot up to £1.8m by taking Fixed Protection under the transitional rules but this is only available until 5 April 2012. Taking protection will broadly mean that no further contributions can be made on or after 6 April 2012 but the Lifetime Allowance of £1.8m is retained. Individuals who elect for this Fixed Protection may wish to maximise their contributions in 2011/12 before the restrictions on future contributions take place.
The flexible drawdown provisions came into effect from 6 April 2011 allowing individuals to take benefits with no restriction on the maximum income that can be taken each year provided they have secure annual pension income of at least £20,000. To be eligible, all contributions must cease in the previous tax year. This condition means that many individuals will only be able to elect for flexible drawdown for the first time from 2012/13 and so may wish to maximise contributions before 6 April 2012.
Protected rights benefits, including the requirement to draw pensions by the age of 75, will be abolished with effect from 6 April 2012. For those considering drawing pensions, advice is necessary as it will be best to delay vesting benefits until on or after 6 April 2012 to avoid the current protected rights restrictions.
Companies are also affected by the new pension rules. Auto-enrolment will mean all UK employers must include eligible employees into a Qualifying Workplace Scheme (QWPS), the National Employment Savings Trust (NEST) or into existing company pension schemes by the phasing in date and make at least minimum contributions. The relevant date depends upon the number of employees on their PAYE scheme at 1 April 2012. Companies must be aware of their staging date, which is as early as 1 October 2012 for the largest companies. Many employers will face significant increases in staffing costs and should be planning for this now.
Before planning how you might apply the points above, we also recommend that you speak to your Personal Financial Adviser or BDO contact for more information on setting up plans and making contributions.
20 February 2012