Pension Changes April 2011

It seems hardly any time at all since pension simplification was introduced in 2006 and here we are with a revised set of rules. Some key changes have been made both in terms of input amounts and the way in which the benefits on crystallisation can be take.

First, ASP has been abolished which will no doubt enable some peopel to give a sigh of relief. Also, the special annual allowance and associated charges are also abolished along with changes to the maximum contribution levels being revised downwards.

These notes aim to give readers a high level view of the April 2011 changes as they affect advisers and clients.

Contribution Levels

With effect from April 2011, the maximum contribution is set at £50,000. This encompasses member, employer and third party contributions. However, HMRC has introduced a carry forward facility which allows a member to use up any of the £50,000 which has not been used in the previous three tax years. Those for 2011/12, members of schemes could make contributions of up to £200,000 lesscontributions already made in teh previous three tax years. If the input period can be changed, this may be increased to £250,000. As with all things to do with pensions and HMRC, they are never as simple as first glance so readers are advised to visit HMRC website to check out the detail.

The input on money purchase schemes is measured in the same way as pre April 2011, that is to say actual contributions made. The measurement of input with final salary schemes has been altered and is now calculated using a factor of 16 rather than 10 as was previously the case. However, the previous year's value can be indexed in line with CPI before conducting a calculation.

The annual allowance will not be tested against contributions made in the year of death, or where a member retires through ill health or serious ill health. However, it will be tested in the year of retirement and in the case where enhanced protection had been claimed.

Where a member's scheme has accepted contributions in excess of the maximum amount, an annual allowance charge will apply but at a rate applicable to the member i.e. 40% to 50%.

Lifetime Allowance

With effect from April 2012, the lifetime allowance will reduce to £1.5m. There will be some people who had registered for protection at A day and they could be disadvantaged by the reduced figure, at least in the short term To counteract such a situation a new level of protection is introduced, referred to as underpinned lifetiem allowance. This means that someone's primary protection factor will be protected until the lifetime allowance exceeds £1.8m. In addition, there will be some people who did not qualify for protection, but since A day they have funds which exceed the £1.5m. These members will be able to claim fixed protection, which enables them to test their benefits against £1.8m, provided that:

• no new registered scheme is established after April 2012, except for receipt of transfer of existing benefits
• no contributions can be made to a money purchase scheme after April 2012 except for NI rebates (limited benefit) and contributions to a pension term assurance which started before April 2006

Trivial commutation lump sums are also protected at 1% of £1.8m.

Age Restraints removed

Up until April 2011, members of money purchase schemes had to buy an annuity by the age of 75 or commence ASP, with all the restrictions imposed with this method. In the last six months or so of the last tax year, the age was extended temporarily to 77, although lump sums could not be taken after 75. From April 2011 this limit has been removed which means that there is no requirement to crystallise benefits by the age of 75, whether in respect of income or lump sum. A benefit cyrstallisation event will still take place.

Drawdown

Unsecured pension as a term has been abolished and is replaced with drawdown, in two forms, capped and flexible.

• Capped

Capped is broadly similar in structure to unsecured pension. The previous limit of 120% of GAD has been replaced with 100% of GAD. Reviews will be every three years rather than the five years pre April 2011. The structure follows unsecured pension arrangements structure in most other cases.

• Flexible

This variant of drawdown allows a member to take whatever they wish from their arrangement provided that they have a minimum income of £20,000 (known as MIR). The £20,000 must be secured income. No other contributions can be made once a member elects to take flexible drawdown.

Death Benefits

The upper age limit removal for taking benefits has alos had an effect on lump sum death benefits. There is now no upper age limit for the payment of lump sum death benefits, although a 55% charge will apply where death occurs after 75. Lump sums taken after cystallisation but before 75 will also attract the 75% charge.

If you need help, contact me, Geoff, through this form or by calling 01324 83 28 20.