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On ‘A Day’ or 'Appointed' Day all existing pension rules were abolished and we now have one single pensions regime for all schemes.
The Government’s initiative to simplify the pensions market came into effect on 6 April 2006 – ‘A Day’. As well as simplifying the types of pensions available, the Government introduced a cap on the total amount of money that you can have in your pension because of the generous tax breaks offered. Any existing pension money above this limit not 'protected' (see below) will suffer a penal tax charge.
The purpose of pension schemes remains to help individuals provide a replacement income during retirement and provide, where required, a tax-free cash lump sum. They continue to enjoy their tax advantages, both in terms of a fund that grows virtually free of tax and also tax relief on contributions made to a scheme.
The new rules have created numerous changes which provide both opportunities and some potential pitfalls that you should consider.
The main pitfall is that if you currently have or are likely to have substantial pension funds, you could be affected by the new pensions cap.
This means that when, at some future point, benefits are taken from the pension fund, if the fund exceeds the lifetime allowance, the surplus will be subject to additional tax, known as the lifetime allowance charge. This will be 25% where the fund is used to provide additional income or 55% if the surplus is taken as a cash sum.
Lifetime allowance
The lifetime allowance enables individuals to enjoy favourable tax treatment on their pension funds up to the allowance which commences at £1.5 million in 2006/2007. This will increase each year until it reaches £1.8 million in 2010/2011 when the first review will be undertaken.
For individuals who already have funds in excess of the lifetime allowance or wish to ring-fence their fund against the risk of being subject to the new tax charge, there are two forms of protection available.
- Primary Protection provides an individual whose pension is already in excess of the lifetime allowance the ability to register the fund and therefore have their own higher personal limit. This limit will then be indexed in line with the retail price index.
- Enhanced Protection enables an individual to ring-fence their existing pension fund plus future potential growth provided that, once granted, they do not make any further contributions.
New opportunities
For the majority of people the new rules are a welcome change, making pensions more understandable and more flexible.
There are significant opportunities to optimise your position if your pension fund is large at the moment. However, good advice and regular reviews are essential to ensure that full advantage is taken of all the available options.
All of these create significant tax planning opportunities and we recommend you seek professional advice and if you want or need to apply for protection this must be done before 5 April 2009.
The Information contained here is general and you shall always seek specific advice about your own personal circumstances.
To take advantage of a pension review you need to be a Coutts client. If you are already a client, please speak to your private banker or contact us at pensions@coutts.com. If you wish to apply to become a client, please either complete this form or contact us on +44 (0) 20 7753 1963.