Tax Free Cash Changes
The proposed new rules concerning Tax Free Cash will allow a greater degree of flexibility to individuals. From A-Day, those eligible to take pension benefits will be able to take their Tax Free Cash without the need to take any income. It will also be possible to continue making pension contributions because there will be no need to actually retire to take pension benefits. For example, those liable to higher rates of tax and over 50 years of age on A-Day will be able to make pension contributions attracting 40% tax relief, then take 25% Tax Free Cash immediately, for example:
- A £100,000 contribution is comprised of a £60,000 individual contribution and £40,000 in tax relief
- £25,000 can be taken immediately as Tax Free Cash
- The net outlay is therefore £35,000 to provide a £75,000 pension fund
The simplified tax regime will make pensions much easier to understand. However, during the transitional period before A-Day, individuals may wish to review their existing pension arrangements to ensure that their current Tax Free Cash entitlement will not be reduced. Only individuals with fund values near £1.5 million will be able to register their funds and Tax Free Cash for protection.
Many who have a Tax Free Cash entitlement in excess of 25% risk having it capped at 25%. As a general rule, pensions held with a higher entitlement will not lose that entitlement if they are kept where they are, but most transfers made after A-Day will result in the higher entitlement being lost. It is therefore essential to seek financial advice now so that any re-arrangements can be made prior to A-Day in order to protect the higher Tax Free Cash amount.
Individuals with a higher entitlement to Tax Free Cash at A-Day need to ensure that the pension scheme has the evidence of earnings required for the calculation. If benefits are not taken for another 15 years and no evidence can be found at that point, the entitlement will be limited to 25%.
Increase to Minimum Pension Age
The minimum age that an individual may take pension benefits under all types of arrangements will increase from 50 to 55 years of age from 6th April 2010.
Benefits at Retirement
The term 'retirement' can be interpreted loosely as there is no longer a need to retire to take pension benefits. Where an employer scheme permits, an individual can draw benefits and continue to work.
The major changes being proposed to benefits at retirement are:
- 'Income Drawdown' is being renamed 'Unsecured Income'. The main difference is that 'Unsecured Income' allows the Tax Free Cash to be paid without any need to take an income. Income Drawdown required an income to be taken each year although this did not necessarily align with the individual's needs or tax status.
- 'Alternatively Secured Income' is a change that may appeal to many individuals as from 75 years of age there is now an alternative to buying a conventional annuity. Income is drawn from the fund as required, subject to a maximum annual limit. There are various options on death including redistribution of the fund to other members of the scheme, including family members. Although a death tax charge of 35-40% is likely, this option means clients can now consider pensions when planning for Inheritance Tax.
Death Benefits
From A-Day, life cover can be incorporated within pensions and contributions may be eligible for tax relief. The only restriction is that the overall death benefits from your pensions (including any return on the fund) do not exceed the 'Lifetime Allowance' (£1.5 million for 2006).
Please note that the proposals are subject to final amendments. Asquith & Partners will be monitoring developments closely: visit our website regularly for updates.
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