Prime Time Financial

There are currently a large number of pension-related changes at various stages of implementation. Some are now in place, while others are still short on detail, but here is our summary of what’s happening when, and who might be affected (as far as we know it).

Allowances

The Lifetime Allowance is the maximum amount of pension benefit which can be accrued before additional tax charges are levied. It reduced from £1.8m to £1.5m in April 2012. Those already over £1.5m could have applied to protect a higher sum if it has been accrued already (called "Fixed Protection").

Various things were previously linked to the Lifetime Allowance including the “Trivial Commutation” limit. This allows you to take the whole of your pension plan if it is small (less than 1% of the Lifetime Allowance). But from April 2012 this was de-linked from the Lifetime Allowance and will remain at £18,000.

Since April 2011 there has been a reduced Annual Allowance of £50,000. That refers to the amount you (and your employer, for example) can add to all your pension plans in a year and still get full tax relief. For defined benefit (“final salary”) pensions, it is related to the increase in the value of your benefits from the beginning to the end of the year, and if you have a large pay rise during the year you may find you are unexpectedly over the allowance and have a tax bill to pay.

But caution is needed - if you put more than that into a new pension plan starting today, it could still be caught by the allowance next year due to the complicated “Pension Input Period” rules, although there are new rules which may make it possible to carry forward unused allowance from previous years.

Anyone caught by the new limit could look at alternatives including funding your spouse’s pension, or ISAs.

State Pensions

State Pension Age for men and women is already in the process of rising to 66 by 2020. However, the Government have proposed that the process be accelerated.

A new Flat Rate Pension (£140 per week?) has been proposed - possibly from April 2015, although it may not apply to existing pensioners. That would exclude means testing (which would certainly be a simplification), and would encourage everyone to save for retirement.

Age 75 Limit

And talking about ages, 75 used to be the age limit for buying an annuity (or equivalent). The age 75 limit has been removed (April 2011) subject to some constraints. As ever, things are not that simple, though - you may still need to take tax free cash before 75; it is still the limit for getting tax relief on pension contributions, and the tax levied on death after 75 is higher (55%) than before 75 (35%).

Pensions and Employers

Auto-Enrolment into an employer's pension scheme along with NEST - the National Employment Savings Trust - is going ahead progressively from 2012. NEST is intended as the safety-net scheme for lower earners, while all schemes  will require employers to make at least a minimum contribution. It has been called a stealth tax, but if that is what it takes to make people provide for their own future then so be it!

The main action now is for employers to start planning how they will afford it, particularly if they do not fund pensions for their employees already. Large employers have to contribute from 2012, while smaller ones have a bit longer since it is phased in by employer size up to 2016.

“Contracting Out” was the decision you could make to opt-out of the State Second Pension (previously SERPS). You paid less National Insurance but your pension scheme had to provide greater benefits. That is no longer possible for defined contribution (“money purchase”) pension plans since April 2012. One benefit is that you no longer have any constraint on the type of annuity you buy with the resultant "protected rights" money in your pension.

This information is Prime Time Financial’s understanding of the current situation, but we cannot guarantee that it is all correct or will not change before implementation.

Last reviewed 11th April 2012