A-DAY FACTS AT A GLANCE

Here’s a brief summary of some of the key facts and figures that you need to know in the run up to A-Day.

1. CONTRIBUTIONS

Annual Allowance - The allowance for the tax years 2008/2009 to 2010/2011 will be:

For defined benefit schemes, member’s whose benefits increase in value by more than the annual allowance in a year will be subject to a 40% tax charge on the excess. For members of money purchase schemes, if contributions exceed the annual allowance in a year the member will be subject to a 40% tax charge on the excess. Member’s of more than one pension scheme must take into account the value of all benefits, including deferred benefits, when working out whether the annual allowance has been exceeded.

Member contributions - the higher of £3,600 p.a. and 100% of earnings can receive tax relief subject to an overall maximum of the annual allowance.

Employer contributions - there’s no maximum contribution. Employer’s may receive 100% tax relief on the whole contribution. If the contribution exceeds the annual allowance the scheme member will be liable to a 40% tax charge on the amount exceeding the annual allowance. Theoretically, an employer could pay up to the annual allowance for an employee even though they only earn a small salary.  It will be up to the Employer's local inspector of Taxes whether or not the entire contribution will be relievable for tax purposes. Further guidance on this is expected before A-Day.

Concurrency - Anyone will be able to join any type and any number of registered pension schemes at the same time.

2. STANDARD LIFETIME ALLOWANCE (SLA)

The standard lifetime allowances for the tax year’s 2006/2007 to 2010/2011 will be: 

In certain circumstances it will not be obvious if a member’s benefits value exceeds the SLA. The Finance Act 2004 sets out how these benefits should be tested against the SLA. 

If a member decides to take their benefits after A-Day in stages then a proportion of their SLA will be used.

If the benefits value at vesting exceeds the SLA, and the member has not opted for either primary or enhanced protection, the lifetime allowance charge (LAC) can be applied in either of two ways or a combination of both depending on how the excess benefits are taken. The charge is:

• 55% if taken as a lump sum, or

• 25% if taken as income.

3. INVESTMENTS

There will be one set of investment rules for all pension schemes.

• Scheme borrowing - limited to 50% of the market value of scheme assets less any outstanding loans

• Loans to the employer - up to 50% of the market value of the scheme with a maximum term of 5 years, but under certain circumstances the loan can be extended by up to 5 years

• Shares in the sponsoring employer - will be limited to 5% of the scheme assets. There is no limit on the number of shares that are traded on a recognised overseas stock exchange

• Connected party rules - no longer any restriction. But, any asset used by a member or an associate of the member on a non-commercial basis will be treated as a benefit-in-kind

• Pensioneer Trustee - no longer required

• Personal 'chattels' - no change in the current rules, personal 'chattels' will be a prohibited asset

• Property - no change in the current rules, commercial property will be allowed, residential property will be a prohibited asset

• Investments held before A-Day - not affected by new rules.

4. PROTECTION

There are 2 types of protection, primary and enhanced. 

5. MINIMUM AND MAXIMUM PENSION AGES

From A-Day to April 2010 the minimum age will be 50.
Benefits on ill health early retirement can be taken earlier.

From 2010 the minimum age will be 55.
Benefits on ill health early retirement can be taken earlier.

From A-Day income must be secured by a secured pension or an alternatively secured pension by age 75.

6. RETIREMENT BENEFITS

Pension commencement lump sum (PCLS) - The maximum amount of PCLS will be 25% of the benefits value up to a maximum of 25% of the SLA at vesting. There are special arrangements for members with an entitlement to more than 25% of the benefits value or £375,000 PCLS on A-Day.

Income benefit on retirement

7. DEATH BENEFITS

Benefits must be paid out within 2 years of death or they will be treated as an unauthorised payment and will be taxed at 40%.

A dependant is a married spouse or an ex-spouse of a member if they were married when the member first started to receive the pension, child under 23, or a child who is financially dependent because of physical or mental impairment and anyone else who is financially dependent. If a pension is being paid to a dependant child at A-Day then this may continue in payment until the later of the child reaching age 23 and ceasing in full time or vocational training.

Death before benefits are taken (crystallised)

• Lump sum return of fund and/or lump sum benefit
  - up to SLA tax free
  - excess subject to 55% tax charge
  and/or

• Dependants’ pensions (not tested against the member’s SLA)
  - secured income
  - unsecured income – only if dependant under age 75
  - alternatively secured pension – only if dependant over age 75.

Death after benefits are taken (crystallised)

• Secured income

  • Pension protection
    - initial purchase price less income paid to date
    - subject to 35% tax
    - paid to the member’s estate or trust,
    or

  • Pension guaranteed for up to 10 years

  • Any dependant’s pension.

• Unsecured income

  • Lump sum less 35% tax,
    and/or

  • Dependants’ pensions (not tested against the member’s or dependant’s SLA)
    - secured income
    - unsecured income - only if dependant under age 75
    - alternatively secured pension - only if dependant age 75 or over.
     

• Alternatively secured pension

  • Dependant’s pension
    or

  • If there is no dependant
    - money reallocated within the scheme
    - donated to charity.

8. TRANSFER OF BENEFITS

Not all benefits need to be transferred at once, they can be transferred in stages. Benefits are not usually tested against the SLA at date of transfer, except where the transfer is to an overseas scheme.

9. PENSIONS AND DIVORCE

• The pension credit will count towards the recipient’s SLA

• Pension credits don’t count towards the annual allowance

• If there is an existing pension sharing order in force at A-Day, pension credits can be ignored when calculating pre A-Day rights.

10. RETIREMENT ANNUITY CONTRACTS

• Can protect benefits value over £1.5 million using primary or can protect any amount using enhanced protection

• PCLS at retirement will be 25% of fund. There is no protection for higher amounts of PCLS

• Will be able to take benefits at age 50 from A-Day to April 2010

• Will be able to take benefits from age 55 after April 2010

• Carry back and carry forward will be abolished.

This information is based on Stirling House Financial Services' current understanding of the Finance Act 2004 and the Pensions Tax Simplification - Pre-Budget Report Technical Note published on 5th December 2005.