Pensions

Core Principle – people should be given a pensions system that is as easy to understand as possible, and encourages saving, while preventing abuse by the very wealthy.

In some areas (especially corporate and large contribution planning) the rules do not forbid, but simply make unwise, certain courses of action. Expect your Financial Adviser to sometimes say “Yes you CAN do XYZ, but …. ” and the “but” will be worth listening to.

Below are some areas of further information.

Basic Overveiw - New Regime Pensions

All pension schemes must be Registered Pensions Schemes, and contributions are controlled by two allowances:-

  • Annual Allowance – the amount you can invest each year.
  • Lifetime Allowance – the overall fund size limit.

Annual Allowance

The amount of contribution that can be made in any one year on which tax relief may be obtained.

Currently (tax year 2012/13), set at £50,000.*

Note – if your earnings are less than this, then you will get tax relief on the amount of contribution up to your earnings. The first £3,600 of any contribution always gets tax relief, (even if you have no earnings).

You can put in MORE than the annual allowance, but any excess will generally be taxed, so if you wish to do so it is essential that you discuss it with your financial adviser. (This is an example of a “Yes you CAN, but….” situation).

So most people will be able to invest as much as they can afford, in order to build up a sufficient pension fund for their retirement.

It is also possible to move money from savings to pension, and benefit from tax relief in the process. This might well be worth discussing with your financial adviser, especially in the decade prior to your intended retirement. (The aim being to ensure that your post-retirement finances strike the right balance between income and capital).

It is also possible to make contributions on behalf of third parties, (such contributions are treated as having come from the member for purposes of tax relief). This offers scope for people to fund their spouses and dependants’ pensions, if they so wish. Discuss this with your financial adviser.

*For pensions provided on a defined benefit basis, the value of benefits accrued each year will be translated into a notional fund, which is then used to asses your position re the annual allowance.

Lifetime Allowance

The maximum size of fund allowed*, currently (2012/13) £1,500,000**.

If you have multiple funds, this is an overall limit.

If your existing funds are above this level (or may grow so) then you need to consult your financial adviser. You may be able to protect your expected rights – contact your adviser urgently.***

* Not strictly true, your fund can build to any size at all, but the excess will be taxed when you take benefits, and the tax is designed to make it generally financially unsound to over-fund your pension.

** For pensions provided on a defined benefit basis, the value of benefits will be translated into a notional fund, which is then used to assess your position re the lifetime allowance. *** The deadline to protect rights was 5 April 2009. HMRC will accept late applications where reasonable excuses exist. However, as several years’ notice was given of this deadline, the bar to allowing a late application will be very high.

Last updated on April 6, 2012

Registered Pension Schemes

Schemes to provide pensions are called registered pension schemes.*

There are four main types of pension scheme, called arrangements:-

Defined benefit arrangements

Benefits are determined by some kind of criteria, and are not dependent on the amount of any fund. A common type of defined benefits arrangement is a ‘final salary’ scheme, where the benefits depend on your salary and length of service, although many final salary schemes have closed since the recession in 2008.

Money purchase arrangements

Money purchase arrangements are also known as defined contribution schemes. Benefits are entirely dependent upon the funds built up for the member. Most arrangements made by individuals are of this type, as are many company schemes. The following types of pensions are normally money purchase:

  • Personal pensions
  • Stakeholder pensions
  • Retirement annuity contracts
  • SSAS – Small Self Administered Schemes
  • FSAVC – Free-Standing AVC schemes
  • SIPP – Self Invested Personal Pensions

Hybrid arrangements

These occur when a scheme promises some kind of minimal value, irrespective of actual fund performance.

For example the terms might be ‘1/60th for every year of service, or whatever the fund buys, if greater’. If performance was good then the full fund will be used and it will be a money purchase arrangement. If there was poor performance, then the scheme would pay out the 1/60th and be seen to be defined benefit.

Cash balance arrangements.

A type of money purchase arrangement where, in the event that the funding fails to provide the required level of benefits, it will be made up to that level.

* In theory there can be other schemes which are not, but as these would not benefit from the favourable tax treatment of registered pension schemes their use is expected to be limited, normally only for people whose unusual circumstances prevent them qualifying for a membership of a pension scheme, or who are over their lifetime allowance and need alternative arrangements. Such schemes however fall outside the tax environment for pensions.

Last updated on April 06, 2012

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