Pension Simplification - Financial News Summer 2004

01 July 2004

After a consultation period, the Chancellor is now pressing ahead with the simplification of pensions. The intention is to achieve a transparent, consistent and flexible system, which can be easily understood. One tax regime will replace the eight currently applicable to different pension types.

The consultation period has clearly been effective, as there have been significant changes from the original green paper. Following representations from the pension industry the implementation date will be moved back 12 months to April 2006, and the maximum fund size limit will be raised to £1.5 million (previously £1.4 million), rising to £1.8 million by 2010. This will be reviewed every five years.

The main changes will be as follows:

• The maximum pension fund allowable per individual will be £1.5 million, to increase annually by a given amount, this to be reviewed 5 yearly
• Funds over this at retirement will become available as cash, subject to a 55% tax charge. Likewise if the surplus is taken as income, this will also be taxed heavily
• Individuals will be able to invest up to £215,000 per annum or an amount equivalent to their salary, whichever is the lower. This limit will increase by £10,000 each year until 2010. It will be reviewed every 5 years thereafter. Contributions over this will be subject to tax of 40%
• All-new schemes will find that the tax-free lump sum that can be taken at retirement is limited to 25%

Some options at retirement will also be changed:

• For those not wishing to purchase an annuity before age 75 they may still draw down from the fund. After having taken a tax-free lump sum, a minimum £1 of the fund will need to be drawn. The maximum that can be drawn is limited to 120% of the best single rate level annuity. This is more flexible than the current arrangements.
• Alternative Secured Income (ASI) will provide an alternative to purchasing an annuity at age 75, as is currently the case. Death benefits will be restricted however

Individuals whose funds are likely to be in excess of the maximum fund size prior to April 2006, will have to ensure that they have registered their fund in time, so that it does not become hit by the new regulations.

Likewise those whose pensions allow them to draw a tax-free lump sum on retirement in excess of 25%, will need to have the tax-free cash certificated, otherwise they may be forced to take the smaller tax-free lump sum.

In all this is a fairly laudable initiative by the government. It is it is refreshing to observe that they have listened to those who will be involved in implementing the new contracts and revised their thinking in several respects. Higher earners will need to be on their toes, however, to ensure that they do not lose out.

For more information please contact Simon Ludden, Financial Planning Manager.
 

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