| |
Who is likely to be affected?
1. Pension scheme savers in occupational and personal pension schemes,
employers, the pensions industry, and Independent Financial Advisers.. General description of the measure
2. Simplification will replace the eight existing tax regimes with a
single universal regime for tax-privileged pension savings. The numerous
controls in the current regimes will be replaced by 2 key controls in
the new regime. These will be:
- the lifetime allowance; and
- the annual allowance.
3. Additionally, the other main changes are:
- there will be a single set of rules on pensions in payment allowing
all schemes the ability to offer members a tax free lump sum of up
to 25% of their pension fund;
- Occupational pension schemes will have the opportunity to offer
flexible retirement if they wish. This will enable people in occupational
pension
schemes to draw retirement benefits while continuing to work for
the same employer;
- there will be a single set of investment rules for all pension
schemes. Subject to Department for Work and Pensions (DWP) requirements,
pension
schemes will be allowed to invest in all types of investments,
including residential property; and
- the complex approval process for pension schemes will be replaced
by a simplified regime requiring registration only.
Operative date 4. 6 April 2006. Current law and proposed revisions
5. There are currently eight different tax regimes governing pensions,
each with its own complex rules limiting the amount an individual can
contribute to a pension scheme and the consequent benefits a scheme can
pay out. This has led to anomalies between Defined Benefit (DB) and Defined
Contribution (DC) schemes in the level of contributions that can be made
and what benefits can be taken.
6. Contributions are currently subject
to an earnings cap (£99,000
in 2003-04). However, current schemes allow different levels of contribution.
For example:
- occupational schemes (1989 regime): employees may contribute, with
tax relief, up to 15% of earnings up to the earnings cap. Employer contributions
are limited to the earnings cap; yet
- personal pension plans (1988 regime): individuals may receive
tax relief on contributions up to the higher of £3,600 a year
or a percentage of capped earnings, the percentage varies on age.
- Even then, different rules apply to pre-1970 schemes, post-1970
schemes, 1987 regime, and Retirement Annuity Contracts. Members of
Retirement
Annuity Contracts also have the facility to carry forward and
carry back unused relief from year to year.
7. These regimes also have different rules regarding what benefits can
be paid out to members. Members in a 1989 occupational scheme are limited
to two thirds of final earnings up to the earnings cap after 20 years’ service,
but there are no limits on the size of pension benefits for people in
personal pensions. There are also different rules governing the amount
of tax-free lump sums that different schemes can pay.
8. Under simplification all these controls will be removed. In their
place will be a single set of rules that will apply to all tax registered
pension schemes. Benefits that schemes pay out will be decided by scheme
design and not by Revenue regulations.
9. The key elements of the simplified regime will be:
The lifetime allowance will be reviewed quinquennially.
- An annual allowance initially set at £215,000. It will increase
steadily each year such that in 2010 it will be at £255,000
for contributions to DC schemes or increases in accrued benefits
in DB schemes.
The level of the annual allowance will be reviewed quinquennially.
- Contributions will no longer be limited to a fraction of capped
earnings. Individuals will be able to make unlimited contributions
and tax relief
will be given on the higher of 100% of relevant earnings or, where
the individual contributes to a scheme that operates relief at source, £3,600.
- All Schemes will be able to pay tax-free lump sums of up to 25%
of the value of the pension rights. The maximum permissible tax-free
lump
sum rises, under simplification, to 25% of lifetime allowance.
- A lifetime allowance charge of 25% on funds in excess of the lifetime
allowance. Funds in excess of the lifetime allowance may be taken as
a lump sum, in which case the lifetime allowance charge will be at
a rate of 55%.
- An annual allowance charge of 40% on contributions or increases
in excess of the annual allowance.
- In order to value the capital worth of defined benefits for the
purpose of the lifetime allowance, there will be a single valuation
factor of
20:1. Individuals who receive payment of a pension at 5 April 2006
will be treated as having used up part of their lifetime allowance
if, after
5 April 2006, they receive payment of a new benefit. The factor for
valuing such pensions will be 25:1, which reflects the fact that people
will
generally have taken tax-free lump sums.
- A valuation factor of 10:1 will be used to measure the annual increase
for the purpose of the annual allowance.
- Transitional arrangements will protect pension rights built up
before 6 April 2006. There will also be protection for rights to lump
sum payments
that exist at 6 April 2006. There will be two options for transitional
protection from the lifetime allowance charge:
- Primary Protection which will be given to the value of the pre-April
2006 pension rights and benefits in excess of £1.5 million; or
- Enhanced Protection which will be available to individuals who
cease active membership of approved pension schemes by 6 April 2006.
Provided
that they do not resume active membership in any registered scheme,
all benefits coming into payment after 5 April 2006 normally will
be exempt
from the lifetime allowance charge.
- The minimum pension age will rise from 50 to 55 by 2010. Those
with certain existing contractual rights to draw a pension earlier
may have
that right protected. There will be special protection for members
of those approved schemes in existence before April 2006 with low normal
retirement ages, such as those for sports people.
- It will no longer be necessary for a member to leave employment
in order to access an employer’s occupational pension. Members
of occupational pension schemes may, where the scheme rules allow it,
continue
working for the same employer whilst drawing retirement benefits.
- Employers will continue to be able claim a deduction in computing
profits chargeable to UK tax for employer contributions paid to a registered
pension scheme. The Government intends to continue the current practice
of spreading large contributions over 2 to 4 years.
- It will continue to be a requirement that pensions are secured
by age 75. However, pension income may be delivered after age 75 through
Alternatively Secured Income, an alternative method to provide benefits
via an income for life which may be used by those with principled objections
to the pooling of mortality risk.
- Death benefits from a scheme can be in the form of either a lump
sum, a pension to one or more dependants or a combination of lump sum
and
pension. This will depend on whether the benefit is in payment at the
time of the member’s death and the age of the member at death.
- There will be new, simpler processes for scheme registration and
reporting. The current limits on what a scheme may invest in will be
lifted and
replaced by a single set of investment rules for all pension schemes.
- Non-registered pension schemes may continue in the new regime,
but without any tax advantages. They will be treated like any other
arrangement
to provide benefits for employees. Amounts in non-registered pension
schemes will not be tested against the lifetime allowance and the lifetime
allowance charge will not apply to them. Transitional protection will
be available for pension rights accrued at 6 April 2006 within non
registered schemes.
Further advice
10. If you have any questions about this change, please contact the
helpline on 0115 974 1600 www.inlandrevenue.gov.uk
|
