Pension Changes Confirmed

Our high level summary below details the key points introduced in the proposed changes to the current pension regime. We will contact clients who may be specifically affected by these changes as appropriate, however, if you would like to discuss the changes in more detail, please do get in touch.

Annual Allowance

The annual allowance determines the limit on contributions that may be made in a tax year and benefit from tax relief. From 6 April 2011 the annual allowance will reduce from £255,000 to £50,000; this includes both employer and employee contributions.

There is potentially an opportunity for clients who wish to contribute in excess of this amount to take advantage of the newly introduced ability to carry forward unused allowance from the previous three tax years.

Contributions over £50,000 and not covered by the Carry Forward facility, will incur a charge linked to the individual’s marginal tax rate.

Lifetime Allowance

The lifetime allowance is an individual’s total permitted tax-relieved pension savings and from 6 April 2012, this figure falls from £1.8 million to £1.5 million. Any pension fund over this amount will suffer a charge of effectively 55% whether taken as income or as a lump sum (assuming higher rate taxpayer status).

Fixed protection will allow those who suspect their total pension worth to be over £1.5m when they take benefits to fix their lifetime allowance at £1.8m. The downside is that no further contributions can be made after 5th April 2012.

Individuals who previously registered for enhanced, primary or lump sum protection of pension benefits at the time of the ‘A day’ changes in 2006 will not lose this, although it will only be based on a lifetime allowance of £1.8 million going forward.

Annuity Changes

As part of the changes the Government has announced the end of the requirement to buy an annuity at age 75. These measures come into effect on 6 April 2011. Unsecured Pension (USP) and ‘Alternatively Secured Pension’ (ASP) will be replaced by a single type of income withdrawal called ‘Drawdown Pension’. There will no longer be a requirement to take a minimum pension.

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BDB Financial

February 7th, 2011

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