Following last month’s Emergency Budget, we have put together some observations and planning points related to pensions, based around the following areas:
- Why put money into pensions
- Why do it now rather than later
- How do the new rules affect those taking pension benefits
Our Pensions Team can advise on these and a wide range of other pension and pension-related issues. Please feel free to contact us.
Why put money into pensions
- Capital Gains Tax (CGT) changes
CGT has increased from 18% to 28% for higher rate taxpayers. Investments held within a pension are exempt from CGT, so this strengthens the argument to invest via pensions rather than personally.
- Accelerated Increase to State Pension Age
The move to age 66 for the State Pension has been accelerated (April 2016 for men and April 2020 for women); as State Benefits diminish, the need for private provisions increases.
- Pension contributions for those with earnings between £100,000 and £130,000
Individuals with earnings in this bracket will see an effective rate of tax relief of up to 60% on personal pension contributions.
- Pension contributions for those with earnings between £130,000 and £150,000
Those with earnings in this bracket can make a pension contribution and mitigate anti-forestalling measures, which restrict the tax relief on the contribution. You can reduce relevant income by up to £20,000 by making a personal pension contribution potentially removing you from the restrictions altogether.
Why make contributions now rather than later
- Restrictions to higher rate tax relief
These had been mooted, but have been rejected. Instead, the proposal is that the Annual Allowance (currently £255,000) will be lowered to around £30,000-£45,000 per annum from April 2011. There is a window of opportunity for those with income levels above £30,000 but below £130,000, to make significant contributions that are above the new proposed annual allowance between now and next April.
Rules affecting retirees and those about to retire
- Under 55, in Unsecured Pension (USP) and considering a transferring your pension?
HMRC had ruled that those over 50, but under 55, who had entered USP could transfer to another USP scheme without this being treated as an unauthorised payment. However, the ruling said that any income drawn after such a transfer and taken before age 55 would be an unauthorised payment. HMRC have just issued an announcement confirming that they will introduce legislation, backdated to 6 April 2010, to allow those in USP to transfer and draw income without penal taxes applying.
- Reaching (and going beyond) age 75
The requirement to secure an income e.g. buy an annuity or use Alternatively Secured Pension provisions by age 75 has been scrapped. New rules will be introduced; in the meantime anyone who turns 75 on or after 22 June 2010 can defer their decision until the rules are finalised.
Pension death benefits for anyone in unsecured pension age 75-77 will be treated the same as the under 75s, i.e. a taxable dependent's pension can be taken from the fund or a lump sum less 35% tax. Note that there are still actions to take by age 75 so it is not a question of “doing nothing”.
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