Brian Mclean

Budget 2010

Emergency Budget 2010

New dates for pension auto-enrolment

January 2012

The government has announced a revision to the rules requiring employers to provide work-based pensions to their employees. As a result of the tough economic climate, small firms will be given longer to comply with the new pension auto-enrolment rules.

Full implementation will not be achieved until 2018 for some firms although larger employers will be required to start the process in October this year, 2012.

As a result of the changes, employers with fewer than 30 qualifying workers will have implementation dates ranging from between 1 January 2016 and 1 April 2017, and those with 30 to 49 staff have from 1 August 2015 to 1 October 2015. Firms with 50 to 249 staff must implement the scheme between 1 April 2014 and 1 April 2015.

Despite the delays to the implementation dates for smaller firms, all employers are being encouraged to act sooner rather than later and start the process of planning their implementation to avoid last minute problems.

New pension regime from April 2011 - new flexible pension income options

Following on from the emergency budget of 22 June, the Coalition Government has made further announcements on 9th December 2010 with details of the process on removing the requirement to secure income under a money purchase registered pension scheme by age 75. Legislation will be established to start the new regime from 6th April 2011.

This legislation will introduce a new tax framework for drawing income on retirement. The principles for this framework are much the same as those applicable to the current tax regime e.g. pensions as a means of providing income for retirement and not as a vehicle for passing on wealth to future generations. However, the new regime will offer pension scheme members more flexibility on drawing their retirement income.

Proposed pension changes

From 6th April 2011 there will be no specific age by which income has to be secured from pension funds e.g. purchase of an annuity. Income withdrawal in a form similar to unsecured pension (USP) will be available beyond age 75 subject to a cap. There is no minimum annual income limit and therefore no requirement for income to be drawn at all.

Alternatively Secured Pension (ASP) will no longer exist as from 6 April 2011. The new capped drawdown limits will apply to existing individuals drawing income via ASP as from 6th pril 2011.

On death under the new capped and flexible drawdown arrangements (detailed below) any remaining funds paid out as a lump sum death benefit will be subject to a tax relief recovery charge of 55%. This recovery charge will apply regardless of the age of the individual at date of death while drawing income under the new flexible USP.

On death before age 75 any lump sum paid in respect of 'uncrystallised' funds (i.e., not yet in payment) will remain tax-free. There is no recovery charge where the remaining funds are used to secure an income for a dependant.

Ordinarily, inheritance tax (IHT) will not apply in addition to the recovery charge in the event of death. In order to deter the use of pension funds as a way of passing on wealth the recovery charge will be set at an appropriate rate.

Annual Allowance (AA)

From 6th April 2011, the Annual Allowance for tax-privileged pension saving will be £50,000 (reduced from £255,000 in 2010-11). There is no proposal to index the level of the AA during the forecast period. Beyond that, the Government will consider options for indexing the level of the AA .

Relief will be available at an individual's marginal tax rate and the tax charge for exceeding the AA will be a tailored charge, to recoup the full marginal rate relief that an individual has benefited from.

Those who are members of Final Salary schemes will have a 'deemed contribution' which will be calculated via a flat factor, set at 16, meaning that an increase in annual pension benefit of £1,000 would be deemed to be a contribution of £16,000.

Where individuals exceed the AA in a given year, due to one off spikes in accrual, unused allowance from up to three previous years will be available to offset against the excess pensions savings. Carry-forward will be available against an assumed AA of £50,000 for the tax years 2008-09, 2009-10 and 2010-11. This is most likely to be used for those in Final Salary schemes.

The most recent announcements confirm that the Annual Allowance test, unlike in the current tax year, will still apply in the year of crystallising benefits. The exceptions to this will be on death and serious or severe ill health. HMRC has confirmed the definition of severe ill health as being ill health that makes them unlikely to be able to undertake gainful work (in any capacity) and at any time in the future (otherwise than to an insignificant extent).

Tax relief on contributions

Relief on personal contributions will be available at the individual's marginal rate for contributions up to the available Annual Allowance, including carry forward of unused annual allowance from previous years, or UK relevant earnings if lower. The one exception is where an individual uses the new flexible income withdrawal arrangements described below.

Where flexible income applies, any further contributions paid to any registered pension scheme will subject the client to an Annual Allowance tax charge on the full contribution value. No tax relief will be granted on contributions paid to registered pension schemes after age 75.

Lifetime Allowance (LTA)

The Government announced on 14th October 2010 that the Lifetime Allowance from 6th April 2012 would reduce from £1.8 million to £1.5 million.

Individuals who previously registered for Primary and /or Enhanced Protection are not affected by the change. For Primary Protection a Lifetime Allowance of £1.8 million will still be applied to their personal Lifetime Allowance factor.

However the Government recognised that there would be individuals who had continued to build pension rights in the expectation of a Lifetime Allowance of at least £1.8 million who could be significantly affected by the reduction in the Lifetime Allowance.

They have now announced that individuals who are not registered for Primary or Enhanced Protection will be able to apply for what is known as 'fixed protection'. Although the relevant form is not yet available from HM Revenue & Customs they have confirmed that application for this protection must be received by them no later than 5 April 2012.

Fixed protection

What is protected?

The value of an individual's benefits up to £1.8 million. Any excess value above £1.8 million will still be subject to a Lifetime Allowance tax charge of currently 55%.

What are the rules that will apply for this form of protection?

The rules broadly follow those which applied for the original Enhanced Protection. They are:

• No money purchase contributions paid on or after 6 April 2012.
• Defined Benefit annual accrual (typically from a final salary scheme) of no more than CPI increase unless stipulated in the scheme rules on 9 December 2010.
• Contracted-out rebates (from national insurance contributions) received on or after 6 April 2012 will not invalidate fixed protection.
• Contributions used to continue to fund existing life cover arrangements will not invalidate fixed protection.
• Where transfers are concerned the new arrangement can only accept a permitted transfer.
• Permitted transfers are those between money purchase schemes and into a money purchase scheme from defined benefit or cash balance schemes. Transfers between defined benefit schemes and cash balance schemes will fail this test.

Removal of the requirement to buy an annuity at age 75

Existing income drawdown rules are to be replaced with effect from 6th April 2011 by new rules governing Capped Income and Flexible Income, with the possibility of deferring lump sum payments beyond age 75.

Capped Drawdown

This replaces both the existing rules for Unsecured and Alternatively Secured Pensions (USP and ASP). The maximum amount of income that can be drawn will be 100% of a comparable annuity based on revised GAD tables that will be extended beyond age 75. The comparable annuity must be reviewed every three years up to the anniversary of entering drawdown after the 75th birthday and annually thereafter.

Existing USP rules relating to the re-basis of maximum income (e.g., additional designations and annual member reviews) will be carried forward into Capped Drawdown rules up to age 75 except that additional designations cannot reduce current income.

Transition to Capped Drawdown

The Capped Drawdown rules will apply for those who have Unsecured Pension as at 5th April 2011 from the earlier of:

• The end of the current five year review period.
• The first scheme income year anniversary following the 75th birthday, or if already aged 75 from the first anniversary after 5 April 2011.
• The first scheme income year anniversary following transfer to a new drawdown provider.

The rules also apply for those who entered ASP before 22nd July 2010 from the start of the annual drawdown period in which 6th April 2011 falls. This means those currently in ASP can stop taking income if the next anniversary of entering ASP falls on or after 6th April 2011.

Flexible Drawdown

From 6th April 2011 individuals over the age of 55 that meet the Minimum Income Requirement (MIR) of at least £20,000 per annum will be able to drawdown an unlimited amount out of their crystallised pension funds. The amount drawn will be treated as income for tax purposes.

To enter Flexible Drawdown individuals will self certify that they meet the MIR. Having entered Flexible Drawdown there will be no restrictions on the income the individual can draw. Capped Drawdown rules will cease to apply.

The income included for satisfying the MIR must be guaranteed and payable for life. The income that will count towards the MIR includes the basic state pension, additional state pension, level annuity income and Scheme Pensions. Purchased life annuities, other state benefits and drawdown income do not count towards the MIR.

To be eligible for flexible income the individual must have ceased to be an active member of any defined benefit scheme before an election can be made.

Any contributions to a money purchase scheme made in the same tax year as the election for Flexible Drawdown will be subject to an Annual Allowance charge and therefore taxed at the individual's highest marginal rate.

The current MIR is set at £20,000 per annum and is reviewable every five years by Treasury Order. Individuals who become temporarily resident abroad will be taxed on all withdrawals of Flexible Drawdown Pension if they return to the UK within a five-year period.

Please note that these points have not been enacted yet and may be changed before implementation. The Finance Bill 2011 will enact the provisions relating to the Annual Allowance (AA) and Lifetime Allowance (LTA) and we await further clarification from the government relating to the implementation of all new measures.