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A-DAY IS April 6 2006, when sweeping new changes to UK pensions legislation will come into action making pensions simpler, more flexible and will give more choice as to how one plans our finances for and in retirement. For those who have been reading about A-day in the UK press, but are not quite sure what it is all about, this article will provide the basic facts.
If you have a UK pension, you may need to review it to determine whether or not you should take action, this way you can ensure you get the best possible deal out of the revised legislation. If you are 50 plus and near to retirement, you should look at how the new rules affect you. Ignore the issue and you may lose out on some of your pension pot.
On A-Day, eight different tax regimes for pension schemes will be replaced with one simpler scheme and a common set of investment rules. For the first time ever, it will be possible to invest in residential property in the UK and overseas.
The amounts that employees may contribute into pensions are currently subject to extremely complex rules. These will dramatically change, and the amount one can contribute and obtain tax relief on will increase dramatically.
In simple terms, those readers still paying into the UK pension system will be able to contribute up to 100 per cent of their earnings (subject to an upper ceiling of £215,000) and receive full tax relief. If you are employed now, there will be no maximum limit on the amount your employer can pay into the fund, but it will only be tax deductible when it is paid.
The amount you can pay into your fund annually will increase from £215,000 in 2006/7 by £10,000 every year until in 2010/11 when it reaches £255,000.
The amount that you can save tax free in your UK pension fund will be sealed at £1,500,000 for 2006/7 and will be known as the lifetime allowance. It will increase from next year to £1,600,000 in 2007/8, £1,650,000 in 2008/9, and £1,750,000 in 2009/10, until it reaches £1,800,000 in 2010/11. Both these rules will be reviewed every five years.
If the value of your fund goes over this limit, you will be liable for tax at either 25 per cent on any income paid, plus tax due in Portugal if you reside here. Alternatively, you will be taxed at 55 per cent on any lump sum taken from any excess above the lifetime allowance.
There are steps you can take to avoid punitive charges if the lifetime allowance affects you. You can register pension rights accrued before A-Day to avoid any tax on the excess. There are two ways in which to do this – Primary Protection or Enhanced Protection – so you will need to establish which one is most appropriate.
From A-Day, the maximum tax free cash lump sum you can take will be capped at 25 per cent. If your pension fund allows you to take a cash lump sum at retirement of more than 25 per cent, you may want to investigate making alternative pension arrangements.
One of the alternatives could be a Self Invested Personal Pension (SIPP), which allows you to invest a range of assets into a pension fund free of UK income tax and capital gains tax. You may, however, have to pay taxes if you reside in Portugal.
Investment in a SIPP can include commercial property, residential homes, holiday homes and buy to let. You will be allowed to borrow up to 50 per cent of the value of your pension fund. If you buy a holiday home abroad, or transfer your existing holiday home into the pension fund, you will have to pay a market rent for it, and that could be subject to income tax in the country where you have the property.
Under the new tax regime, the minimum age at which one can retire will rise from 50 to 55 by 2010. You won’t need to retire in order to draw funds from your pension scheme, so you will be allowed income drawdown or a cash free lump sum up to 25 per cent.
At present, the law stipulates that you have to buy an annuity at age 75. After A-Day, you can opt for an Alternative Secured Income (ASP), which might mean that any pension remaining after you die could be passed on to your beneficiaries. Alternatively, it can be taken as a dependant’s pension by your spouse.
You could choose either one of the two new annuities being offered after A-Day. The Limited Period Annuity lasts for five years when you can then buy another one. The Value Protected Annuity pays out a lower rate than an ordinary annuity, but any unused value of the fund could go to your beneficiaries.
After A-Day, pension rights can be transferred between pension schemes without restrictions. This could include transferring from a UK scheme to an overseas pension fund. Expatriates will still be able to pay into UK personal pension funds after A-Day, providing they have been set up within five years of leaving the UK.
Time is running out for you to get your pension funds reorganised before A-Day 2006. Decisions will have to be made to ensure that you are going to arrange the optimum conditions in which to maximise your pension returns.
Next week I will cover the exciting new opportunities offered by the Self Invested Personal Pension (SIPP).
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