On 6 April next year (A-day), the Inland Revenue will replace the eight rulebooks that govern pension schemes with a single tax regime. Preparation for the change may require a complete overhaul of your existing remuneration structure and pension benefits, and could involve transferring funds to a more efficient pension scheme or plan. Advance planning is essential.
The new regime is part of the government's campaign to encourage greater provision for retirement. It has been designed to make saving through private pensions simpler and more flexible. The government recognises that, given the triple whammy of an ageing population, a falling birth rate and significant increases in longevity, it is vital that we all build adequate retirement income on top of the complex and dwindling state pension.
'Simplification', the new buzz word in pensions, is designed to change all this. It will sweep away the current complex contribution and benefit rules. Instead, there will be an annual ceiling on personal contributions, which will qualify for full tax relief, of 100 per cent of earnings.
One of the biggest innovations is the lifetime allowance, a maximum aggregate total of your pension rights from all your pesnion arrangements. Tax-favoured treatment will normally apply only to funds under the lifetime allowance, which is set at £1.5m for the 2006/07 tax year. In addition, the maximum amount of tax-free cash you will normally be able to withdraw at retirement will be 25 per cent of the value of your pension rights, with an overall maximum of £375,000, ie.e. a quart of the £1.5m lifetime allowance, in the first year of the new regime.
The value of any pension rights above the lifetime allowance will be subject to a punitive tax known as the lifetime allowance charge. The tax treatment of this excess will cary, depending on what you do with it.
The rate of tax chargeable will depend on whether yoiu take the excess as a lump sum or use it to provide a taxable income. Where the excess is taken as a lump sum, it is subject to a 55 per cent tax charge., If it is taken as taxable income, the lifetime allowance charge is 25 per cent, although be aware that the income will also be subject to tax. Fortunately, the new regime is not retrospective, so the Revenue will recognise existing benefits from tax-approved schemes and plans that exceed these limits. Buy you will have to apply for 'primary' or 'enhanced' protection from the Revenue in order to gain this valuable exemption.
For higher earners, retirement pension planning in the new environment will be anything but simple an dnot just because there will be a welcome increase in choice. There are also a whole range of new issues to address, assets to protect and new strategies to be considered. Planning will have an impact on personal as well as financial circumstances.
We can provide you with expert advice about how to analyse the impact of the A-day regime on your position. To assess your situation, please e-mail or contact us.
