FINANCE BILL 2011 & PENSION CHANGES

January 11, 2011

Important Forthcoming Changes To Pensions
Prepared by James D Jones-Tinsley, Pensions Technical Manager
The Coalition Government has unveiled a raft of proposed changes to UK pension law, since first coming to power in May 2010. On 9 December 2010, a significant number of draft clauses were issued.

The proposed changes affect two key areas of pension legislation:-

1. The reduction in the Annual Allowance and Lifetime Allowance; and
2. The removal of the need to buy an annuity at age 75

Reduction in the Annual Allowance and Lifetime Allowance

• The Annual Allowance (which limits pension contributions) will reduce to £50,000 from 6 April 2011.  It currently stands at £255,000;
• ‘Unused’ Annual Allowance (up to £50,000 per tax year) can be carried forward for up to three years (the previous facility to carry forward unused contributions ended in April 2006);
• Individual pension contributions, up to the new limit, will receive tax relief at the individual’s marginal rate of Income Tax (i.e. up to 50% tax relief);
• The current rules restricting pension contributions for high earners (known as “Anti-Forestalling”) will end on 5 April 2011;
• The Lifetime Allowance (which limits pension funds) will reduce to £1.5m from 6 April 2012.  It currently stands at £1.8m; and
• Those with pension funds above (or likely to be above) £1.5m, but without previous versions of protection, will be able to apply for a personalised lifetime allowance of £1.8m, (‘fixed protection’), with certain provisos.

Removal of the need to buy an annuity at age 75

• With effect from 6th April 2011;
• Alternatively Secured Pensions (ASP) will be abolished and existing ASPs converted into ‘drawdown pensions’;
• Unsecured Pensions (USP) will be allowed to continue for life, will also be referred to as ‘drawdown pensions’, and will be available in two forms;
  (a) “Capped Drawdown” – which will operate like USP does currently, but with lower income limits and shorter review dates; or
  (b) “Flexible Drawdown” – from which unlimited drawdown can be taken (subject to income tax at the individual’s marginal rate) and the prior establishment of a Minimum Income Requirement (MIR) – see below;
• Individuals in ASP or USP on 6th April 2011 will become subject to the new drawdown pension limits from their next review date;
• The tax charge on death benefits taken as a lump sum will be 55% at all ages, once benefits have been crystallised, (the current rates are 35% in USP and up to 82% in ASP), unless there are no dependants and it is paid to a charity;
• There will be no tax charge on death for uncrystallised funds up to age 75, where it then becomes 55% – unless there are no dependants and it is paid to a charity;
• The MIR has initially been set at £20,000 per annum.  Where income equals or exceeds the MIR, people may then take any level of (taxable) income from their flexible drawdown arrangement; and
• The MIR must be a secured pension income for life and can be comprised of state pensions, pension lifetime annuities and scheme pensions.

As you can see, the proposed changes are both fundamental and far-reaching.

Based on our understanding of the proposed changes above, we envisage that most of our clients will need advice about how the proposed changes will affect their retirement planning. In the meantime, if you have any queries regarding the contents of this article, please contact your Pearson Jones Consultant.