Pensions Simplification

‘A’ Day (the Appointed day) arrived on 6th April 2006 and brought with it sweeping and radical changes in relation to pension legislation.

This has created a single universal regime to replace the previous eight tax regimes and the changes have affected savers in occupational and personal pension schemes, employers and financial advisers.
Pension simplification introduced two new controls, the pension Lifetime Allowance (LA) and pension Annual Allowance (AA).
From April 2006, there is now just one set of tax rules for all types of pension, with an individual LA of £1,030,000 (2018/2019) and an individual AA of £40,000 (2018/2019).  All individuals will be able to fund up to these limits with the possibility to also carrying forward unused AA from the previous 3 years of up to £40,000 per annum.

Exceeding the LA or the AA will simply trigger a tax charge.

Additional considerations:

•Early retirement age available from age 55
•Full concurrency (i.e. being able to pay into any array of plans you wish), subject to the annual allowance and potential for carry forward
•Wide investment flexibility
•Up to 25% Tax Free Cash
•The ability to commute up to three ‘small’ funds of less than £10,000, as a one off lump sum as opposed to having to draw a regular income
•Flexible options at retirement when deciding to take benefits such as capped and flexible drawdown
•No need to ‘have to’ secure benefits at age 75 via an annuity

Pension Freedoms from 6th April 2015

Further sweeping changes came about following the Chancellor’s Budget speech in March 2015:

Flexi Access Drawdown – this will operate in the same way as Capped Drawdown does at present however, there will be no limit on the income taken. After you have taken your entitlement to the tax free lump sum at outset (usually 25% of the policy value), you can choose to take as much or as little of the remaining pot as you wish and it will be added to any other income you have in that tax year to determine the income tax rate that will apply.  Please note that if you draw any income from this plan, your future pension contributions will be limited to a £4,000 maximum Annual Allowance.

Uncrystalised Funds Pension Lump Sum (UFPLS) – this new option allows you to take a chunk of money (as little or as much as you wish) from an existing pension plan.  Once you have decided how much you want to take out, 25% of the payment will be tax free and the remainder will be subject to your marginal rate of income tax.  If you use this option, any future pension contributions will be limited to a £4,000 maximum Annual Allowance.

Annuity plans – the current rules on annuity plans will be relaxed to allow plans to offer increasing and decreasing income levels as well as lump sum payments to beneficiaries on death at any time.

In addition radical amendments to the treatment of pension plans on death also became law. This has resulted in the pension plan being an extremely powerful estate planning and tax mitigation tool.

All of the above options will be available to existing plans under the new legislation but it will depend on your particular policy provider as to whether they want to offer these additional features.

Why not contact us to review your retirement planning?