|
Burying your head in the sand is definitely not a tax-efficient way to deal with the introduction of the new pension tax regime from 6 April next year. This strategy will not help you avoid the punitive 55 per cent tax charge on pension fund assets that exceed the new prescribed Inland Revenue limits.
|
Lifetime allowance charge
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 vary, depending on what you do with it.
|
|
Preparation
for change
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
'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 pension 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, i.e. a quarter of the £1.5m
lifetime allowance, in the first year of the new regime.
|
The rate of tax chargeable will depend on whether you 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. But you will have to apply for 'primary' or 'enhanced' protection from the Revenue in order to gain this valuable exemption.
Higher
earners
For higher
earners, retirement pension planning in the new environment will be
anything but simple and not 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 financial position. To assess your situation, please e-mail or
contact us.
|
