Client News Letter - November 2010

Pensions special
Our previous client newsletter reported the removal of the requirement to secure pension benefits by the age of 75. Now, other important developments have been announced, which reflect both the government's austerity measures and the need to close the savings gap if adequate provision is to be made for the retirement of a population whose potential lifespan continues to increase.

Tax relief on contributions
There is no limit to the amount which can be contributed to pensions, but there is a limit to the government's generosity in providing tax relief on contributions, and this "Annual Allowance" has been reduced from a theoretical limit of £255,000 a year (which for high earners was in practice reduced to £20,000 or £30,000) to a standard £50,000 p.a.. Tax relief on contributions up to this amount will be available even for those earning over £150,000 p.a. and paying tax at the new 50% rate.

The new Allowance will come into force on 6 April 2011, which provides a window of opportunity for those able to take advantage of the current higher limit.

The new rules will curtail the practice of pumping large sums into pensions in the final year before retirement, though this loss will be compensated in part by the re-introduction of a carry-forward facility which will permit any unused contribution allowances to be carried forward from up to three previous tax years.

Final salary schemes
The reduced Annual Allowance applies to both defined contribution schemes (of which personal pensions are the most common example) and final salary schemes. Contributions to the latter are calculated by working back from the amount of additional pension which accrues each year and multiplying this by a factor to arrive at a value which is tested against the annual allowance. Currently the factor is 10, but this is being increased to 16, which could result in fairly small salary increases creating deemed pension contributions which exceed the limit and trigger a tax bill in the following tax year.  

Commentators are suggesting that the resulting complications will further discourage employers from maintaining final salary schemes.

Flexible drawdown
One of the proposals already announced by the coalition is to allow ‘flexible drawdown' whereby pension savers will be able to make unlimited withdrawals from their pension schemes, subject to income tax, provided that they have first applied part of their funds to secure a sufficient level of pension income to ensure that they will never need to fall back on the State.

This facility is designed for personal pension schemes and will be difficult for occupational schemes to provide - another possible reason for savers wanting to switch to a personal pension. However, the Government has announced its intention as from 2012 to ban transfers from contracted-out final salary schemes to personal pensions. So another window of opportunity presents itself!

Final salary transfers
Final salary benefits are usually to be treasured, and transfers should never be undertaken without independent advice. However, there are a number of other situations in which transfers could be desirable:

•·   Where the scheme member is a single person and can derive no advantage from the dependants' benefits provided by the scheme

•·   Where the member stands to receive substantial benefits from a spouse's scheme

•·   Where the member has doubts as to the employer's financial viability

•·   Where a wealthy member wishes to extract funds from the scheme for inheritance tax planning

•·   Where the member is in serious ill-health and might be better served by an impaired life or enhanced annuity.

Lifetime allowance
The maximum value of the pension pot which can be accumulated during an individual's working life without incurring a tax penalty (the "Lifetime Allowance") will be reduced from the current level £1.8m to £1.5m from April 2012.  Transitional arrangements are expected for people whose pension pots already exceed the new limits.

Nest
The Government has given the green light to the National Employment Savings Trust, a new form of company pension scheme which all employers with more than 50 employees will be required to join as from 2012 and which will involve the automatic enrolment of all employees unless they opt out  ("auto-enrolment"). Employers will be required to pay 1% of salary initially, rising to 3% by 2017.

The introduction of NEST reflects the failure of the Stakeholder experiment, which depended on employees' willingness to opt in. 

State pension
The State pension age is to be increased to 66 for both men and women by the year 2018, and means-testing is to be abolished.

Pension alternatives
The Government's savings will depend on savers not switching to alternatives to pensions, and schemes such as employer-funded retirement benefits schemes (EFRBS) may well be proscribed.

November 2010

No responsibility can be accepted for the accuracy of the information in this newsletter and no action should be taken in reliance on it without advice. Please remember that past performance is not necessarily a guide to future returns.

The value of units and the income from them may fall, as well as rise. Investors may not get back the amount originally invested.