New Tax Year: New pension rules!
I feel it is fair to say that it is a difficult and often unwanted task to keep up with the constant 'tinkering' with pensions.
Even in a world where we are overloaded with information, people learn to switch off and focus on things which they are interested in. That is often the case with pension legislation!
So I thought I would put together a brief summary of some of the recent pension changes that could effect you. Here goes....
The Reduction in the Lifetime Allowance to £1 million
The lifetime allowance is a test carried out at various points during the life of the pension and is carried out on each Benefit Crystallisation Event (BCE). BCE’s occur at key points during the life of the Pension which include the member drawing benefits. The Lifetime Allowance is reducing from £1.25 million to £1 million. The Lifetime Allowance applies to ALL Pension Schemes.
Please note that the government have announced that they plan increase the Lifetime Allowance each year in line with the increase in the consumer prices index from 2018 to 2019 onwards. Please note that Future Financial Planning cannot guarantee this will happen.
Transitional Protection
Following the reduction in the Lifetime Allowance there have been 2 new forms of protection introduced which will enable members to protect their pension funds if they believe they will exceed the new limit. The new forms of protection are called Fixed Protection 2016 and Individual Protection 2016 and work in a similar way to the Fixed Protection 2014 and Individual Protection 2014. It should be noted that members will be able to apply for the 2 new forms of protection on the HMRC website from July. Members can apply, in the interim, by writing to HMRC and further details can be obtained from HMRC website. It is still possible for members to apply for Individual Protection 2014 and the deadline for applying for this protection is the 4th April 2017. Transitional protection is very complex, so seek professional advice where necessary.
Tapered Annual Allowance
This new ‘reduced’ Annual Allowance applies to members with income (including the value of any pension contributions) of over £150,000 and who have an income (excluding pension contributions) in excess of £110,000. Where a member is subject to the tapered annual allowance, the annual allowance will be reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000. Therefore any member receiving an income of £210,000 or more would have a reduced annual allowance of £10,000. In addition to the new tapered annual allowance, members receiving an income under the new flexible benefit route are subject to the Money Purchase Annual Allowance (MPAA) and both of these rules could apply to certain members – In some circumstances this could reduce the Annual Allowance to £nil.
Tax changes on death benefits
As expected the tax charge that applies on the lump sum death benefits for members when they die after 75 has changed. Any benefits paid as a lump sum will now be taxed as Income at the beneficiary/beneficiaries' rate of income tax.
Serious ill health benefits
If a member meets the requirements to take a serious ill-health lump sum, but for the fact that they have accessed their pension, they will now be able to take the remaining funds that have not been accessed as a serious ill-health lump sum. Where a serious ill-health lump sum is paid to an individual who has reached age 75, it will be taxable at that individual’s marginal rate rather than at a flat rate 45%. The amendments under this section will come in effect from the day after Royal Assent of the Finance Bill 2016. There is no charge to income tax on the payment of a serious ill-health lump sum to a member who has not reached the age of 75.
In summary, these things are complicated and ever changing. We may be biased, but we would also suggest speaking to a professional, Independent adviser about the matters raised in this blog. Please feel free to contact us on 01255 377 009 or email info@futurefp.com
Have a great tax year!
John
