Annual Allowance Changes (effective 6 April, 2011)

• Annual allowance will be reduced from the current £255,000 to £50,000 for tax year 2011/2012 and will be linked to a person’s marginal tax rate.
• Any unused Annual Allowance can be carried forward for a period of up to 3 years (with a ‘deemed’ AA of £50,000 for tax years 2008/2009 and 2009/2010).
• For those with Defined Benefit (DB) membership the factor used in valuing DB pensions will be raised from 10 to 16, and the previous year’s benefits will be re-valued. When calculating the total pension input for deferred benefits, any inflation-linked increases will not be included.
• The only exemptions that will apply will be in the year of death or in a year in which a lump sum is paid due to severe ill health.
• Transitional rules will apply effective from 14 October, 2010 – this ensures that any contributions paid before that date will not be considered.

The Annual Allowance is designed to neutralise tax relief that may be gained through excess contributions.

Lifetime Allowance Changes (effective 6 April, 2012)

• Lifetime Allowance will be reduced from £1.8m to £1.5m.
• Maximum total value of pension funds eligible for trivial commutation will be fixed at £18,000, rather than 1% of the LTA.
• The introduction of a ‘Fixed Protection’ for those who have legitimately accumulated funds up to £1.8m. This is similar to Enhanced Protection and Primary Protection and is relevant to people whose retirement funds may exceed the new £1.5m limit. Fixed Protection can be applied for by individuals with a personal LTA of £1.8m providing that they do not accrue benefits after 5 April, 2012 (though pension sharing orders will not count here and if the individual is auto-enrolled by an employer then he/she must opt out within a month. You will have until 5 April, 2012 to apply for this using forms that will be available at a later date. Online application for this will not be available. Anybody with an existing Enhanced and Primary Protection that was applied for before 6 April, 2009 will not lose out here as the Primary Protection will still apply to an LTA of £1.8m.

Removal of the requirement to annuitise by age 75 (effective 6 April, 2011)

‘Flexible Drawdown’ will be introduced in April 2011 and will end compulsory annuitisation at the age of 75.

Drawdown is a method of drawing income from a pension without the need to buy an annuity.

Maximum income will be reduced from 12% of the ‘basis amount’ and minimum income from age 75 will no longer apply. Maximum income will be reviewed every three years up to age 75 and every year thereafter.

‘Flexible Drawdown’ will be available to individuals with a ‘lifetime income’ of at least £20,000 allowing withdrawal of unlimited amounts if the scheme allows – this option will be available for all new drawdown arrangements from 6 April, 2011. For arrangements made before that date, the Flexible Drawdown option will be available from the start of the next reference period if 75th birthday is after 6 April, 2011. For those whose 75th birthday falls before that date, Flexible Drawdown will be available from the start of the pension drawdown year in which 6th April, 2011 falls. For those whose 75th birthday falls between 22 June, 2010 and 5th April, 2011, Flexible Drawdown will be available at the beginning of the next drawdown year starting on or after 6 April, 2011.

Those who live outside the UK for a period of less than five full tax years will be taxed on the withdrawal when they return to live in the UK.

A 55% tax charge will apply to any lump sum death benefits after the age of 75, but no charge will be made if death occurs before the age of 75.

Inheritance Tax won’t apply to any drawdown pension funds that remain after death, even if the death is after the age of 75.

Please note that nothing in this article should be regarded as advice. Planning for Life cannot be held responsible for the outcome of any action taken based on this article if advice has not been sought beforehand. You should contact Planning for Life on 01439 770 105 or through our website, www.planningforlife.org, or your professional advisers, before taking any action relating to your personal finances and pensions. 

Planning for Life is authorised and regulated by the Financial Services Authority; our number is 448184.