Pensions - the new rules
Pensions in theory became much simpler to understand, following some key changes to the tax rules that were introduced on 6 April 2006 (known as A-Day). The aim of this report is to explain the main changes. It is important to obtain specialist advice about your pensions strategy whether you are an employer, an employee or you are self-employed.
The new rules do genuinely have the simplifying effects intended by HMRC (Her Majesty’s Revenue & Customs, formerly the Inland Revenue). But a few aspects have turned out to be very complex, and these changes are so crucial that you should be making a complete reappraisal of your financial planning strategy.
The changes mainly affect how much can be contributed to pensions, the limits on the benefits that can be withdrawn from them and how those benefits can be taken. The new rules will generally apply to all pension schemes regardless of when they were set up.
Unchanged Features
Some key aspects of pensions have not changed:
- Contributions normally qualify for full tax relief.
- Employer contributions do not attract National Insurance.
- The contributions are invested in a fund that accumulates free of UK tax on investment income and capital gains, although pension funds cannot claim the tax credits on dividends from UK shares.
- Part of the pension fund can be taken as a tax-free lump sum (although the rules have changed) and the rest as a taxable income for life.
- Life assurance can be provided under pension plan rules and the premiums are allowable for tax, although the rules have changed.
Annual allowance for contributions
There will be a big increase in the maximum you will generally be allowed to invest into your pension each year and obtain tax relief. You will be able to contribute up to 100% of your earnings. Your employer may be able to contribute more and the overall annual allowance will be £245,000 in 2009/10 – this will rise in later years. Even if you have no earnings, you will still be able to invest £3,600 a year before tax relief.
Lifetime allowance
Everyone will have a maximum permitted tax-exempt fund (or its equivalent in retirement benefits). This will be called the lifetime allowance. In 2009/10, it will be £1.75 million and will rise in later years.
New 50% higher tax rate and pensions
Finally complex rules have been introduced prior to the introduction of the increased 50% higher personal tax rate on 6 April 2010 (for earnings in excess of £150,000). This will prevent the new higher rate being avoided by contributing extra amounts into your pensions. The rules are very complex and if you think you will be affected by then please contact us directly for some advice.
In addition from 2011/12 higher rate tax relief on pension contributions will be phased out from those with earnings above £150,000.