Autumn statement brings further pension changes
March 8th, 2013
In his Autumn Statement on 5 December 2012, the Chancellor announced yet more changes to the ‘simplified’ pensions regime which will further complicate matters for higher earners in particular. This article provides a brief outline of the most important changes and highlights some key points to bear in mind.
Reduction in the standard lifetime allowance (SLA)
From 6 April 2014, the Standard Lifetime Allowance (SLA) which places an overall ceiling on the amount of savings that most individuals can accumulate over the course of their lifetime without suffering a tax charge will reduce from £1.5m to £1.25m.
To counteract this another round of ‘fixed protection’ will be available to anyone (regardless of the current level of their pension savings) who does not already have enhanced, primary or fixed protection 2012, who expect that their pension savings will be more than £1.25m when they come to draw their benefits.
Under fixed protection 2014, individuals will continue to benefit from a lifetime allowance of £1.5 million, until such time (if at all) the SLA exceeds £1.5 m in the future.
The deadline for registering for fixed protection 2014 with HMRC is 5 April 2014 but in order to keep this protection, there must be no ‘benefit accrual’ after this date.
The Government is also consulting on introducing a form of ‘personalised protection’ which will give individuals who register for it a fixed personal lifetime allowance equal to the greater of (a) £1.25m and (b) the value of their pension rights on 5 April 2014 (subject to a cap of £1.5m).
If introduced, this option will only be available to individuals with total pension rights already in excess of £1.25 million on 5 April 2014. Anyone selecting ‘personalised protection’ would be able to continue accruing pension benefits without losing this protection.
Under both fixed protection 2014 and personalised protection, any pension rights in excess of the applicable lifetime allowance will continue to attract a 55% tax charge.
Individuals who may be affected will need to consider whether to elect for protection .Those potentially affected include not only those individuals aged under 75 with benefits still to take, but also those in receipt of a drawdown pension that commenced after 5 April 2006 . A further lifetime allowance test at age 75 on that fund may result in them exceeding the reduced £1.25m SLA at that time.
Anyone considering electing for fixed protection should try and ensure that their pension savings are appropriately maximised by this date given there can be no further accrual after 5 April 2014
For those looking to take benefits in the next few years’ consideration could also be given to taking benefits earlier in order to reduce the percentage of the SLA that would be used up. For example, crystallising benefits with a value of £500,000 in 2013/14 would only use up 33.33% of the SLA, but taking the same amount in 2014/15 would use up 40% of the SLA.
Individual’s in receipt of a drawdown pension could also consider taking higher withdrawals from their fund in order to minimise the chances of facing a LTA charge on attaining age 75 and if someone still has benefits to take from a defined benefit scheme, giving up some of their pension for a tax free cash sum could also reduce the crystallised value to be tested against the LTA.
Reduction in the Annual Allowance
From 2014/15 onwards the annual allowance, which places an annual limit on the total amount of tax efficient ‘pension input’ that can be made to registered pension schemes, will be reduced from £50,000 to £40,000.
There are no proposed changes to the carry forward rules though, which means that the maximum amount of any unused annual allowances from tax years 2011/12 to 2013/14 inclusive that can be carried forward to 2014/15 will still be based on the current £50,000 limit.
Once introduced, this new limit is likely to be particularly onerous on members of DB schemes with high salaries. Care will also need to be taken where a contribution is paid on or after 6 April 2013 into a money purchase arrangement to ensure that it falls in a pension input period in the desired tax year
The maximum income limit will increase from 100% to 120% of the otherwise available annuity based on the GAD tables.
HMRC have confirmed the date of this change will be 26 March 2013 with the revised limits applicable from the start of the next drawdown pension year commencing after this date.
With annuity rates continuing to fall, this 20% increase is to be welcomed for people with a genuine need to maximise the income they can take from their drawdown fund although an income of 120% GAD based on current rates will still provide a significantly lower income than 100% GAD would have done when the ‘simplified’ regime was first introduced on 6 April 2006.
Great care should also always be exercised whenever maximum income withdrawals are being considered – especially if the plan is to draw the maximum income for a sustained period and/or the individual has little in the way of other pension provision to fall back on. This is because drawing the maximum income will maximise the chance of the funds being depleted, which in turn could not only reduce the maximum income available after the next scheduled review but also reduce the amount of guaranteed income that could eventually be purchased with that drawdown fund.
If you do think you might be affected by any of the above changes please feel free to contact us for further advice or guidance