Archive for the ‘News’ Category

Pension News – where are we now?

Monday, May 9th, 2011

There is so much going on the UK pensions arena. A-day (06 April 2006) was supposed to bring pension simplification and to some extent it did so. However, since A-day and particularly since the advent of the Coalition Government we have seen change upon change.

Below we set out mention of many of the changes – real and potential (but please note these are only intended to be a high level summary):

  • State Pensions
    • From 06 April 2010 the number of qualifying years contributions to get a full pension reduced to 30
    • From 06 April 2010 the start date for females for the State Pension began increasing with the intention that by 2020 it will have equalised with males at age 65
    • However, it is now proposed that State Pension Age will increase for both genders further so that it has reached age 66 by April 2020
    • From April 2011 the basic state pension will increase every year by the highest of:
      • Growth in average earnings
      • Growth in prices (2011/12 RPI, thereafter CPI)
      • 2.5%
    • Under current legislation State Pension Age is due to increase to age 67 by 2036 and 68 by 2046. However, it is generally expected that it will rise to age 70 before either of those dates
    • The Coalition Government is considering a Foundation Pension (c£8,000 pa) for all which would replace the State Basic Pension, all State Additional Pensions and many of the means tested benefits. This is unlikely to apply to any pensions already in payment
  • Contracting out of the State Additional Pension
    • From 06 April 2012 there will be no further contracting out for defined contribution pension schemes (including all personal pension schemes)
    • Also from 06 April 2012 Protected Rights will cease to exist and simply become ordinary rights
    • From 06 April 2012 the contracting out rebate for defined benefit pension schemes will reduce from 5.3% to 4.8%
    • If (when) the single level pension is introduced it is likely that all contracting out will cease
  • Default Retirement Age
    • From 01 October 2011 the concept of a default retirement age has been abolished
    • This means that an employer is no longer be able to force employees to retire at a certain age (typically 65) unless there are health and safety reasons for employees to no longer be employed
  • Auto-enrolment
    • Auto-enrolment will begin in October 2012 for the largest employers (from July 2012 on a voluntary basis)
    • Employers can have an optional three month waiting period before auto-enrolling employees (but employees can opt to join during this period)
    • Auto-enrolment applies to all employees aged between 22 and State Pension Age who earn a minimum of £7,475 pa
    • Employers can self certify that an alternative pension scheme which they have meets the requirements for them not to use NEST
  • Compulsory Annuitisation
    • For years it has been compulsory to annuitise (crystallise) pension funds by age 75
    • Recently the age limit was increased to 77 (as an interim measure)
    • From April 2011 compulsory annuitisation has been abolished
    • From April 2011 the options from age 55 onwards are:
      • To take a pension commencement lump sum (PCLS) which is currently limited (in most cases) to 25% of the amount being crystallised and is totally tax free
      • To purchase a conventional annuity
      • To purchase a short term annuity (typically for five years)
      • To purchase a flexible / unit linked annuity
      • To take capped drawdown, ie to drawdown (taxable amounts) from a crystallised pension fund limited to a maximum amount per annum – the maximum is dependant upon a number of factors including the amount of the fund, gender, age and interest rates
      • To take flexible drawdown, to take as much taxable drawdown as required at any time after self-certifying that a minimum income requirement (currently £20,000 pa) has been met
    • On death before crystallisation the pension fund can be paid to nominees (usually at the discretion of the trustees) completely free of tax
    • On death after crystallisation any pension fund remaining can be paid to nominees after deduction of a tax charge of 55% (zero if paid to charity)
    • Death after age 75 counts as post crystallisation even if crystallisation has not taken place
  • Lifetime Allowance
    • The lifetime allowance for 2010/11 and 2011/12 is £1,800,000
    • For 2012/13 and onwards it will be reduced to £1,500,000
    • There is an unresolved issue in that if prior to 06 April 2012 an individual had crystallised 90% of the LTA (ie £1,620,000) would he still be able to crystallise 10% of £1,500,000 after April 2012?? The legislation / regulation says yes, but…..
  • Annual Allowance
    • For 2010/11 the annual allowance is £255,000
    • For 2011/12 it has reduced to £50,000
    • But the anti forestalling regulations have been repealed from April 2011
    • Thus from April 2011 all persons are able to contribute up to 100% of their annual earnings subject to a maximum of £50,000 and a minimum of £3,600 (ie even with zero income)
    • If less than £50,000 was contributed in any of the three previous years the difference can be carried forward after the current year’s allowance has been utilised in full
    • Contributions in excess of the annual allowance (including any carried forward – see above) can be made but there are tax consequences of doing so (the annual allowance charge)
    • There will be no annual allowance charge in the year of death or in the year when serious ill health benefits are taken. But there is no exemption for the year when all pension funds are crystallised
  • Early Access
    • HMT has consulted re accessing pension funds prior to age 55. The options it is consulting on are:
      • Loans – allowing members to borrow from their pension fund
      • Permanent withdrawal – allowing members to permanently remove funds without any repayment obligations possibly only in limited circumstances, eg cases of hardship
      • Tax free lump sum – allowing members to take their 25% tax free lump sum at any stage but then losing the right to ever take any tax free lump sum again
      • Feeder fund model – linking more liquid savings (eg ISAs) into pension funds
    • Now it seems that HMT will not be going ahead with early access as they now consider that there is no evidence that early access will increase pension savings

It is intended that this page will be updated periodically

Please see below for more details of some of the above items