For 2011/12 onwards the annual cap on the amount of tax effective pension savings is to be reduced to £50,000. This compares with the previous amount of £255,000. However, the good news is that it is confirmed that tax relief will continue to be available at an individual’s full marginal rate of up to 50%. The pension cap takes account of an individual’s own pension savings, any employer contributions and the deemed value of any increased benefits under final salary type arrangements. The basic £50,000 limit rule is supplemented by other provisions which allow a three year carry forward of unused allowances. But due to restrictions on the timing of the input period, advice should be sought to make sure the rules are applied correctly.
The rules have always allowed some flexibility over taking pension benefits. The flexibility was increased substantially from 6 April 2011. There will be no need to use the pension pot to acquire an annuity at age 75. This will allow individuals the choice of remaining invested in the stock market or elsewhere. This change increases the likelihood that a pension pot will remain in place at the time of an individual’s death. The tax charge on the fund will be a flat rate of 55%. While this is a high rate of tax, it replaces both the income tax that would have been borne on income drawn from the pension and inheritance tax on any amounts in the individual’s estate. This could encourage wealthy individuals to leave their pension pots for the benefit of their heirs. There are also changes to the level of income which may be drawn from a pension pot, by way of income drawdown. The general position is that drawdown will be limited to 100% of a bench mark annuity rate applied to the value of the fund. This is more restrictive than the previous rules.
However, in a highly significant change, individuals who have secured a pension income of at least £20,000, known as the minimum income requirement (MIR), are to be granted complete flexibility on the drawdown from their pension pots. Accordingly, once the MIR limit is met, an individual may plan their drawdown to ensure that all of the income is taxed at basic rate or 40%, depending on their circumstances. Finally, provided the individual is prepared to accept the income tax liabilities, it would be possible to take the entire value of the pension pot in a single amount. If you would like to discuss your pension options, please contact Mark Dobson at Chiene + Tait Financial Planning on 0131 558 5800 or visit the CTFP website here.