Mixed news for pension holders
For those already drawing down income…the good news
As you will know, the lower drawdown limit that came into force from April 2011 together with plummeting gilt yields dramatically reduced the income pensioners could take each year.
In his Autumn Statement, Osborne has said, “I have listened to concerns from pensioners about drawdown limits”. He then went on to announce that the capped drawdown limit would be raised from 100% to 120% of the equivalent GAD annuity rate – reversing the changes that came into force in April last year.
Don’t panic – the answer is ‘not yet’!
A few of our business owner clients have told us they are concerned about the impact of Auto Enrolment and NEST. Some have been contacted by their bank and been given the impression that they had to set up a pension arrangement for their staff ‘now’ – in 2012.
Although Auto Enrolment is being phased in for all employers from October 2012, it is only likely to become compulsory for most of our clients from 2014 at the earliest. So unless you were already planning on setting up a pension scheme now, don’t worry; there is still plenty of time.
It is possible to set up a pension for your children and grandchildren and fund a stakeholder pension arrangement for them. The gift falls within your annual £3,000 allowance for Inheritance Tax purposes and is grossed up with basic rate tax relief.
But is it a good idea?
If you have total retirement funds that are likely to exceed £1.5m when you come to take your benefits, and you do not already have suitable protection in place, you could suffer a tax charge of 55% on that part of your retirement fund in excess of £1.5m.
This is due to the forthcoming reduction in the Lifetime Allowance, which reduces from £1.8 million to £1.5 million from 6 April 2012. So, if you personally have substantial pension savings or you advise clients who do, then taking out fixed protection should be at top of your financial planning ‘to do’ list.
You could benefit from up to £165,000 in tax savings.
We are responsible for the delivery of unsecured pension income to many clients via SSAS’s or SIPP’s and in addition to taking responsibility for investment strategy, we also advise on funding, access and withdrawal strategies.
Changes are afoot to introduce “flexible drawdown” and to reduce the tax burden post age 75.
The June Budget confirmed the coalition’s intention to abolish the requirement to either buy an annuity or be forced to take a reduced equivalent income from pension funds beyond age 75. They have since introduced transitional rules for those who turned 75 on or after 22nd June 2010, which allow greater income and death benefit flexibility in the short term, but those already over 75 are stuck with the old rules for now.
Tens of thousands of people who earn more than £130,000 and have faced £20,000 pension contribution restrictions since 2009, will enjoy an increased annual allowance of £50,000 from April 2011 AND will be able to carry forward unused pension allowances from the previous three years. However, the good news comes with a stealth warning…you need to qualify first!
The Treasury have at last confirmed that with effect from 6th April 2011 the maximum contribution to pensions (annual allowance) will be reduced from £255,000 to £50,000. Any funding in excess of the £50,000 limit will attract a 55% tax charge.
The method of calculating what the value of a years’ benefit in a final salary scheme is worth in contribution terms will also be altered and the factor used to value benefits against the annual allowance will increase from 10 to 16.