pensions,
tax & annuities
by
Roderick Ramage, solicitor, www.law-office.co.uk
first
published (by distribution to professional contacts) on 30 November 2010
DISCLAIMER
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
The tax regime introduced by the
Finance Act 2004, from 6 April 2006 (A-Day), changed the basis on which tax relievable
contributions can be made to a pension scheme registered with HMRC. The first three years of this regime were
(relatively) plain sailing and very advantageous for the highly paid. A complicated system to limit tax relief for
the highly paid was introduced by the labour Government for 2009/10/11, which
will be replaced by the Coalition Government for 2011/12 with a simpler but
still restricted tax regime.
In his budget speech on 22 April
2009, the then Chancellor’s said this.
“It is difficult to justify how a quarter of all the
money the country spends on pensions tax relief goes, as now, to the top 1½ per
cent of pension savers. So from April
2011, I will restrict pension tax relief for those with incomes over £150,000
so it is gradually tapered to the same 20 per cent rate the majority of people
receive. We will consult on
implementation. I am introducing measures from today to prevent forestalling.”
the
allowances
A taxpayer has two allowances. The annual allowance (AA) is the maximum amount
which may be paid in any pension input period (PIP) and on which tax relief is
granted. An individual’s AA is 100% of
his or her UK taxable earnings up to the amounts in the following table. An AA charge of 40% is levied if the AA is
exceeded.
|
tax year |
annual |
lifetime |
|
tax year |
annual |
lifetime |
|
2006/07 |
£215,000 |
£1,500,000 |
|
2009/10 |
£245,000 |
£1,750,000 |
|
2007/08 |
£225,000 |
£1,600,000 |
|
2010/11 |
£255,000 |
£1,800,000 |
|
2008/09 |
£235,000 |
£1,650,000 |
|
2011/12 |
£50,000 |
£1,800,000 |
|
|
|
|
|
2012/13 |
|
£1,500,000 |
The second is the lifetime allowance
(LTA), which is the value of the member’s pension fund at any crystallisation
date (the date on which all or part of the benefits become payable), taking account
of any prior crystallisations, above which there will be a tax charge of 55% of
the excess if taken as a lump sum or 25% if taken as pension. Members with funds at or above the LTA at
A-Day or which might exceed the LTA could register for primary or enhanced
protection (see 2004 New Year update), and a similar arrangement known as fixed
protection will be made when the LTA is reduced to protect existing benefits in
excess of £1.5m.
Finance
Acts 2009 and 2010 – tax years 2009/10 and 2010/2011
Pending the then intended
restriction on tax relief to the 20% standard rate of income tax for the highly
paid from 6 April 2011, the FA 2009, s72 and sch 35 (amended by the FA 2010,
s48) established the anti-forestalling provisions mentioned in the 2009 budget
speech, which, at the risk of over-simplification, are a claw-back (by
a special annual allowance charge) of higher rate relief, with an exception for
regular contributions (ie, paid quarterly or more frequently).
treasury
statement 14 October 2010 – tax year 2011/12
In its June 2010 budget the
Coalition Government announced that it would seek an alternative approach to
limiting tax relief on pension contributions, in keeping with the previous
government’s aim to reduce the annual cost of pension tax relief by about
£4bn. Anti-forestalling is to be
retained, but the previous government’s proposals for the future will be
repealed and replaced.
With effect from 6 April 2011 the
annual allowance will be reduced to 100% of taxable earnings capped at £50,000. Tax relief will continue to be given at the
taxpayer’s marginal rate of tax. The
deemed contribution to a DB scheme will be calculated using a factor of 16,
increased from 10. In other words, an
annual accrual of £1,000 annual pension is to be treated as a contribution of
£16,000. Any excess in a year’s annual
allowance will be off-set by unused allowances from the previous three
years. Further measures are expected to
ensure that individuals will not have to pay large tax charges from current
income but will be able to pay it out of pension.
beware
of the PIP
An individual’s or scheme’s pension
input period is not necessarily the same as the tax year. If an individual’s PIP began before 14
October 2010 and will end after 5 April 2011, the £50,000 AA will apply to
contributions on and after 14 October 2010, but the whole PIP will be tested
against the £255,000 AA, so a contribution made now if the PIP ends after 5
April 2011 could be liable to both a special annual allowance charge and a
normal AA charge. For those whose PIP
ends before 6 April 2011, there may be scope for paying additional
contributions within the £255,000 AA and obtaining tax relief, even though
there may be a special annual allowance charge.
annuities
At present, with an exception,
designed for persons with “principled objection to mortality pooling”, in the
form of a drawdown known as alternatively secured pensions (with a penal tax
charge of 82% on death), a person with tax relieved pension savings must secure
a pension at age 75 by the purchase of an annuity. This obligation will, as announced in the
June 2010 emergency budget, cease from 6 April 2011, when new arrangements,
expected to be in the Finance Act 2011, come into force. Nothing will prevent an individual from
purchasing an annuity, but, as alternatives, two forms of drawdown will be
available from age 55 without any upper age limit.
The present arrangements for
unsecured pensions for members below age 75 and alternatively secured pensions
for those at and above that age will be replaced by a new arrangement described
in the draft clauses of the Finance Bill as drawdown pensions and in the
consultation papers as capped drawdown.
The annual amount of capped drawdown may not exceed 100% of the
comparable annuity with triennial reviews up to age 75 and annual reviews from
age 75.
The other form of drawdown, to be
known as flexible drawdown, will be available to individuals who satisfy the
minimum income requirement (MIR). The
MIR is that the member has a guaranteed annual income of £20,000 (to be
reviewed every five years) payable for life, which will include state pensions,
pension annuities and scheme pensions, but not drawdown income or non-pension
annuities. A person who satisfies the
MIR may draw down any amount from his or her pension fund, taxable as income.
On the death of the member, in
either form of drawdown, the remaining funds will be available to be used to
provide pension for dependants, lump sums taxed at 55% (but free from
inheritance tax) or free of tax if under age 75 and benefits have not been
taken or tax free charitable lump sums.
END
|
health warning This note is based largely on government
announcements including papers published by HM Treasury at http://www.hm-treasury.gov.uk/consult_age_75_annuity.htm,
draft clauses for the Finance Bill 2011 and various commentaries. The changes in the law, if enacted, may be
very different from the changes as described above. |
copyright Roderick Ramage
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