On the 6 April 2006 the UK government introduced changes to pension legislation which has changed the way in which we provide for our retirement. There are many advantages and we list some below, however if you are worried or unsure about how they may affect you, please contact us about your pension on 0151 648 7615. It may also be worth speaking to your financial adviser.
Registered Pension Schemes
More People Can Pay More Money into Their Pensions
Annual Pension Allowance and Lifetime Pension Allowance
Benefit Crystallisation Event
Protecting Rights from the Lifetime Charge
As Many Pensions as you Want
Investments
Connected Party Rule Removed
Borrowing from Your Pension
Minimum Retirement Age
Continue Working Whilst Drawing Your Pension
Retirement Benefits
Annuity - Secured Pension
Income Drawdown - Unsecured Pension
Phased Retirement
Alternatively Secured Pension (ASP)
Death Benefits
Death Benefits before Retirement
Registered Pension Schemes
To benefit from tax relief all schemes need to be registered with HMRC.
If you are already a Harsant SSAS or SIPP client or we provide administration to your company final salary scheme, we will have registered your scheme for you.
If you are an IFA whose clients are struggling with registering as an Administrator we have an easy to follow guide which we will provide on request.
Similarly for EPP's, who have been told by their insurance company that they will no longer act as Administrator, Harsant are happy to help and become Practitioner to the scheme, administering all HMRC returns.
More People Can Pay More Money into Their Pensions
You can pay as much money as you want into your pension but you will only get tax relief on contributions up to 100% of your taxable UK earnings.
Even if you don't have any earnings, you can still get tax relief on contributions of £3,600.
Annual Pension Allowance and Lifetime Pension Allowance
Rather than limiting the amount you can pay into a pension there are two limits on how much tax relief you can receive.
The Annual Allowance is the total contribution (employer and employee) that you can make into your pension funds per year.
This limit is £215,000 for the 2006/07 tax year, rising to £255,000 by the year 2010/11.
For the first time this will give people the option to put some serious money away for retirement.
If this allowance is exceeded, a 40% tax charge will be imposed on the excess.
The Lifetime Allowance is the overall limit on the amount of tax privileged pension pot you can accumulate in your lifetime.
This is £1.5 million for the tax year 2006/07 rising to £1.8 million in 2010/11.
If this allowance is exceeded the charge will be 55% if the excess has been paid as a lump sum, or 25% if retained to provide a pension benefit.
Benefit Crystallisation Event
To keep track of how much of your lifetime allowance you have used up there is a checkpoint system called Benefit Crystallisation Event (BCE). A BCE is any event where benefits are paid out from any of your pension funds. It could be when a cash lump sum is paid out, or a death claim made. All undrawn benefits will be tested at age 75.
The lifetime limit applies across all your pensions, not just your Harsant pension funds.
Whenever you take some of your pension benefits, you will get confirmation of the proportion of your lifetime allowance used up.
State pension benefits can be disregarded when working out how much of your lifetime allowance you've used up.
Protecting Rights from the Lifetime Charge
If you pension pot was either worth in excess of £1.5 million, or near to that level on 5 April 2006 you will be able to protect these rights from the lifetime allowance limit and charges by registering for protection with HMRC.
There are two types of protection
- Primary Protection
Anyone who has already built up funds of more than £1.5 million before 6 April 2006 can apply to HMRC to protect this fund from the tax surcharge.
- Enhanced Protection
If your pension wasn't worth £1.5 million by 6 April 2006 but you think your investment growth may take it over that by the time you retire, you can apply for Enhanced Protection which would prevent you paying the tax surcharge should that happen.
To keep Enhanced protection you must not contribute to a registered pension scheme after 5 April 2006 (or your employer on your behalf).
Anyone wishing to apply for Primary or Enhanced Protection must do so before 5 April 2009.
As Many Pensions as you Want The new rules allow you to have as many pensions as you want. So you can pay into a Harsant SIPP as well as joining your employer's occupational pension scheme.
Investments
The idea behind the changes was to enable investments in pension funds to become permissive rather than prescriptive, with, as a general rule, no restriction on investments.
However, what the Government has termed "Taxable Property," consisting of residential property and most tangible moveable assets e.g. art, antiques, fine wine, jewellery, classic car, race horse and yachts will create an authorised payment tax charge. The charge will remove the tax advantages.
Unquoted shares are now permitted as an asset class, however, there are complex restrictions imposed by HMRC. Harsant will consider investment in unquoted shares when approached by an IFA with whom we have working relationships and following extensive due diligence.
Connected Party Rule Removed
Transactions between members and connected parties are now permitted, providing the asset is sold to the pension scheme at market value. For example, if your company owns the property from which you run your business your pension scheme can now purchase the property (providing there is sufficient fund in your pension). Once owned by the pension the rental income will be paid into your pension scheme, tax free, and when the property is sold there will be no capital gains tax to pay.
Borrowing from Your Pension
Borrowing will be limited to 50% of the net value of a pension fund.
The Minimum Retirement Age Has Gone Up
On 6 April 2010 the minimum age you can take your pension will go up from 50 to 55. There will be no low pension age for sports people or other occupations (although there will be protection for existing members with such rights).
Continue Working Whilst Drawing Your Pension
You can now continue to work for your employer and draw your pension benefits. This may benefit those wishing to reduce their working week to say, three days. They can now do this whilst drawing their company pension benefits.
Retirement Benefits
A tax free lump sum of 25% of your pension fund may be taken when drawing benefits.
Anyone whose total pension savings are worth less than 1% of the lifetime allowance when they retire will be able to take 100% of their pension fund as a cash lump sum. However, only 25% of it will be tax free. The rest will be taxed. For example, if you were retiring in the 2006/07 tax year and the total saved in pension funds was less than £15,000 (1% of £1.5 million) you could take 100% as a cash lump sum. This is a "triviality payment" and can be taken between the age of 60 and 75.
You may elect to take your Pension benefits either by purchasing an annuity (Secured Pension) or income drawdown (Unsecured Pension) or Alternatively Secured Pension, directly from your Harsant SIPP or Harsant SSAS . You may also phase your retirement or have a combination of phased retirement and pension fund withdrawals. You can therefore arrange your income from your pension fund in any way that suits you, provided it is acceptable to HMRC.
Annuity - Secured Pension
This is the purchase from an insurance company of a Pension, which is guaranteed to be paid for life. The benefits secured are determined at the time of purchase dependent upon the size of the fund and the annuity rates in force at the time. Annuity rates vary according to market interest rates and age. Having selected this option you cannot vary its terms and conditions. The capital is transferred to the insurance company and there is no surrender value.
Income Drawdown - Unsecured Pension
This facility allows you to defer purchasing an annuity and receive an income directly from your Harsant SIPP or SSAS whilst leaving the remainder of your fund invested.
When drawing an income, there is no minimum amount and the maximum will be 120% of the annuity that could be provided using the Government Actuary's Department, (GAD) rates. In other words, after the age of 50 (55 by 2010) you can elect to take up to 25% tax free lump sum from your Harsant SIPP or SSAS fund and leave the remainder invested until such time as you require an income.
At this time we will calculate the maximum annual pension benefits allowable, based on GAD rates, and you can choose to take up to that limit. The pension benefits are treated as earned income and will therefore be liable to income tax.
At age 75 this arrangement changes to an Alternatively Secured Pension.
Phased Retirement
The Harsant SIPP or SSAS enables you to "phase" your retirement from your initial selected retirement date until you are 75. You can, in conjunction with your financial adviser, select the most suitable option each year to meet your current circumstances.
Up to 25% of each phased segment can be taken as a tax-fee cash lump sum and, once activated you can continue to draw income from the rest of the segment as described under unsecured pension. Any segments not en-cashed continue to be invested free of tax (except UK dividend income).
By age 75 all of your pension pot must go into drawdown.
Alternatively Secured Pension (ASP)
Once aged 75, an annuity can be purchased or income withdrawals may continue, subject to revised limits. The amount of pension that can be drawn down is between 0% and 70% of the amount of annuity that could be provided using the GAD annuity rate applicable for a person aged 75. The level of Alternatively Secured Pension must be reviewed annually.
If you choose unsecured pension, ASP or phased retirement there is no guarantee that your income can be maintained. The maximum level will reduce if interest rates and long-term gilt rates fall or the funds investment performance is poor. Large pension fund withdrawals can reduce capital and may not be sustainable, especially if investment returns are poor, thus affecting the amounts available to provide benefits. The value of your eventual Pension depends upon the success or otherwise of the underlying investments. The value of your investments can go down as well as up.
Death Benefits
The following rules apply and are largely dependant on whether you have already started to draw monies from your pension fund and the age at which you die.
Death Benefits before Retirement
If a member dies before taking benefits from their pension funds the total value of their Harsant SIPP or SSAS together with any other pension arrangements will be tested against the current Lifetime Allowance and death benefits paid to nominated beneficiaries in the following way.
A lump sum up to the current Lifetime Allowance can be paid tax free.
Funds in excess of the Lifetime Allowance can be:
- paid as a lump sum, less tax at 55%;
- used to provide dependants' pensions subject to a 25% tax on the fund.
Dependants are defined as spouse, civil partner, a child under 23, a child over
23 dependent on grounds of physical or mental impairment, or person who is financially dependent on the scheme member.
Alternatively, the whole fund can be used to pay dependants' pensions.
Dependants' pensions will be taxed as earned income and can be taken in the following ways:
- a dependant's annuity;
- a dependant's unsecured pension (where the dependant is under age 75); or
- a dependant's alternatively secured pension (where the dependant is age 75 or over).
Member Dies before Age 75 but after taking Pension Benefits
Where a member has started to take benefits from the fund a lump sum death benefit can be paid after deduction of tax at 35%.
Alternatively, dependants' pensions can be provided as outlined above.
If a member dies having taken phased retirement and therefore only taken pension benefits from part of their fund, the death benefits can be a mixture of those outlined above.
An IHT charge can arise in a scheme member's lifetime if they do not exercise their right to take pension benefits. For example, if a scheme member did not take their pension when their life expectancy was seriously impaired, and this resulted in an enhanced death benefit being paid to their beneficiaries, then IHT could apply.
However, IHT is not charged in respect of these enhanced death benefits where the beneficiary is a dependant.
Payments arising in these circumstances which are made to a charity will also be exempt from IHT.
Member Dies on or after Age 75 but after taking Pension Benefits
If death occurs whilst a member is in receipt of an Alternatively Secured Pension, the options are different. No lump sum death benefit can be paid.
The options are as follows:
- If there is a surviving dependant, the alternatively secured pension death benefit must be in the form of a dependant's pension and can be taken as outlined above. There will not be an IHT charge.
- If, however, on the death of the dependant there is still left over funds from the first member, these will be chargeable to IHT and will be treated as if they were in addition to the original scheme member's estate.
- If there is no surviving dependant, the funds can be transferred to another arrangement within the same registered pension scheme. This is called a transfer lump sum death benefit and the funds will be subject to an IHT charge on the death of the original scheme member as if the funds were part of the scheme member's own taxable estate on death.
- Any funds transferred to a charity will be exempt from IHT.
For free advise on pensions, please call Harsant Pensions today on 0151 648 7615 or contact us by e-mail
Top of the page - Harsant SIPP - Harsant SSAS - Harsant Home Page
|
