April 2011 sees the introduction of significant changes to pension rules and limits. 

Annual allowance to reduce from £255,000 to £50,000

If you make considerable pension contributions you should be especially keen to seek advice based on these changes. The new allowance comes into force from 6 April 2011. All individual and employer payments and tax relief must be included within the £50,000 limit. 

Option to carry forward any unused annual allowance

If you have a pension but haven’t reached the £50,000 limit in one year, you will be able to use up your remaining allowance over the next three tax years. This allows you some flexibility to make larger payments when it suits you. 

Tax relief to be given at the individual’s highest marginal rate

If you contribute towards a pension you will continue to receive tax relief at your highest marginal rate – so the unique, upfront tax advantage of pensions remains. Highest rate taxpayers, for example, may be able to receive 50% tax relief.

Lifetime Allowance Reduced

From April 2012 the lifetime allowance will be reduced from £1.8 million to £1.5 million. The lifetime allowance is the maximum amount of pension and/or lump sum that you can get from your registered pension schemes that benefit from tax relief. There is no limit on the amount of benefits that your pension scheme can pay you. However if your pension scheme gives you benefits that total more than your lifetime allowance you'll pay a tax charge on the difference between your lifetime allowance and your pension benefits. For example if your pension benefits total £2 million you'll pay tax on £0.2 million - the difference between the current lifetime allowance and your pension benefits. This tax charge is called the lifetime allowance charge. This charge recovers tax relief that you got when your pension savings were being built up.

Alternatively secured pensions will be scrapped and replaced by capped income drawdown.

Capped income drawdown will allow annual withdrawals between 0% and 100% of the basis amount, which is broadly in line with the amount that an annuity would pay. The need to take a minimum income after age 75 will be scrapped. The capped drawdown limit will be reviewed every three years before age 75 (rather than every five years) and every year after age 75. A new flexible drawdown option will be introduced, allowing withdrawals above the capped drawdown limit as long as the individual has a minimum guaranteed lifetime income of £20,000. Tax on death benefits from benefits already taken, or any remaining fund after age 75 will be charged at a rate of 55%. The lump sum paid on death won’t normally form part of the individual’s estate for inheritance tax (IHT) purposes.

Pension Death Benefit Rules

Information from Her Majesty’s Revenue and Customs (HMRC) signals that there will be a number of significant changes in the pension death benefit rules from April 2011. 

The main changes after April 2011, concern three aspects:

1) what pension benefits can be passed on at death

2) what the tax charges may be

3) what the implications are for Inheritance Tax liability

The last major revisions to the HMRC Pension Death Benefit rules were made in April 2006.

For deaths after 5th April 2011, pension lump sum benefits will be allowed at any age. If these benefits are paid to dependants from ‘crystallised rights’ (relevant existing pensions being paid to the individual, which can be an aggregate of several pensions) a tax charge of 55% will be made - an increase from the present 35%. A tax exemption may be allowed if this lump sum death benefit is made to a charity.

From 6th April 2011, the risk of Inheritance Tax charges on pension rights is lessened. Previously any changes to pension rights by an individual, prior to death, such as deferring taking retirement benefits (depriving an estate by an ’omission to act’) or reducing pension income, could be perceived by HMRC as an attempt to benefit others after their death.

Where HMRC perceives that an individual had deferred taking their retirement benefits or had reduced their pension income for retirement planning reasons, HMRC will not pursue a claim, particularly if the benefit is paid to a widow(er), civil partner or financial dependant.

On death, if before age 75, after 5th April 2011, any lump sum benefit will still be tax free if paid from ‘uncrystallised rights’ - funds held in respect of the member under a money purchase arrangement that have not as yet been used to provide that member with a benefit under the scheme and so have not crystallised.

Lump sum death benefits paid to charities from ‘crystallised rights’ will not be subject to the 55% tax charge. After 5th April 2011 the option to pay non-annuitised pension benefits tax free to charities, has been extended to include deaths before age 75, subject to a number of criteria, including that the deceased member or dependant has nominated a recipient charity. It will be no longer possible for a scheme administrator to nominate a recipient charity.

If you want to find out more about pension death benefits, contact one of the team who will be happy to help – Tel: 01246 810004