21st May 2013

Aegon: Groundhog day part 1

Series of pensions planning ideas for advisers

Most of the pension changes in this year’s Budget had already been announced in the Autumn Statement. We already knew about reductions to the annual and lifetime allowances, the introduction of a new form of fixed protection and an increase in the maximum level of income available from drawdown arrangements. Indeed we could be forgiven for thinking we’d re-awoken not only back in December 2012, but also back in October 2010.

Didn’t we see changes to the annual and lifetime allowances, drawdown and the introduction of fixed protection back then too? Are we stuck in a time loop?

The good news was that higher and additional rate tax relief for personal contributions to registered pension schemes survived (though the additional rate reduced to 45% from 6 April 2013), as did the tax-free treatment of pension commencement lump sums, despite perennial rumours that these attractive tax incentives may be withdrawn. What is consistent, in all times of pension change, is the need for financial advice.

Annual allowance to £40,000 for input periods ending in 2014/15 and beyond

In reality, only a small percentage of clients in defined contribution schemes pay regular contributions of £40,000 or more a year. For those that do, the reduction will apply for ‘input periods’ ending in 2014/15 and beyond, allowing sufficient time to take alternative action. That said, scheme rules should be carefully examined as contributions paid soon after 6 April 2013 could potentially stretch into tax year 2014/15, depending on the specific input period chosen (or operating by default) under each particular arrangement. The delayed implementation also presents an opportunity for some to maximise contributions before the changes take effect. This can be done by exhausting the current year’s annual allowance before bringing forward any unused allowance from the previous three years. Carry forward itself remains unaffected in the short term, with the reduction to £40,000 only starting to be felt when looking back from tax year 2015/16.

The reduction will perhaps be more keenly felt by members of defined benefit schemes, where complex rules set out how the increase in a member’s benefit entitlement in each input period is measured against the annual allowance. An increase in pension entitlement of more than £2,500, in future, may lead to the annual allowance being breached. Even then, for most members, it is to be hoped that the existence of unused allowance to carry forward from the previous three years will reduce, and possibly eliminate, any annual allowance charge arising. The prospect of such a charge may lead some defined benefit members to question whether or not they should continue in active membership, or to opt out in return for an alternative non-pension benefit (if there is one). Clients should be urged to seek guidance before taking action. It’s rarely in a member’s interests to opt out of a defined benefit scheme.

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Pensions