The start of the new fiscal year sees significant changes to the UK pensions landscape. Chief among these are limits on the value of tax-relieved pension savings and benefit accrual and new rules which will reduce the use of other retirement planning vehicles such as Employer Financed Retirement Benefit Schemes. At the same time, individuals will have more flexibility over their pension savings. In this alerter, we set out further details of the changes.

Pensions Tax Allowances

  • The Lifetime Allowance is frozen at £1.8 million (a real terms reduction). It will fall to £1.5 million on 6 April 2012.
  • The Annual Allowance is £50,000 (reduced from £255,000).
  • Carry forward of unused Annual Allowance (measured against £50,000) is available from 2008/09, 2009/10 and 2010/11 tax years.
  • There will be a new capital factor of 16:1 to value DB pension accrual for Annual Allowance purposes (previously 10:1).
  • The opening value of DB rights for a Pensions Input Period will benefit from a CPI uplift.
  • Members may require schemes to meet Annual Allowance charges of £2,000 or more.
  • The Special Annual Allowance charge is abolished.

Compulsory Annuitisation

The effective requirement to use DC pension funds to buy an annuity at age 75 is abolished. Individuals now have the choice of:

  • Continuing to invest their funds without time limit.
  • Entering a drawdown arrangement
  • Buying an annuity.

See ' The New Pensions Tax Regime' - December 15, 2010

Drawdown levels are also changing:

  • Individuals with an annual pension income of less than £20,000 now have a maximum yearly drawdown of 100 per cent of the equivalent annuity which could be bought with the fund.
  • Individuals with an annual pension income of at least £20,000 can now access their funds without any annual withdrawal limit.

See 'Tax and Benefit Notes Gaining access' - February 20011

Transitional Protection

A six-month window will apply for payment of connected pensions, extended from the three-month window originally proposed by HMRC's consultation. This will be with retrospective effect from 6 April 2006.

Transitional protection continues where the member dies before the entitlement to the last of the pensions arises. However, this applies only if the scheme administrator considers the member would have become entitled to all his benefits within the six-month window had he not died.

New rules correct the unintended effect of last year's increase of the normal minimum pension age from 50 to 55. They have retrospective effect from 6 April 2010. This will avoid an unauthorised payments charge arising where an individual transfers his pension to a new provider before age 55.

Employer Financed Retirement Benefit Schemes (EFRBS)

Contributions to EFRBS will be subject to income tax at an individual's highest marginal rate and national insurance contributions as employment income under PAYE. The charge will be based on the full value of the contribution.

Default Retirement Age

Employers may no longer apply a default retirement age. Dismissal because of age will be unlawful age discrimination unless it can be objectively justified.

Click here for the implications for employers.

Exemptions for pension schemes apply. Therefore pension schemes can keep a normal pension age of 65. Exemptions are also available for group risk insured benefits such as life assurance, income protection and private medical insurance.

Reporting Requirements

New reporting requirements apply to schemes:

  • Schemes must provide Annual Allowance information to members on request. This will be mandatory from 2013.
  • Whatever the period covered, reports and returns to HMRC must now use members' NI numbers rather than their names and addresses.

PPF Compensation Level

The compensation cap is now £33,219.36‑the 90 per cent level being £29,897.42.

Revenue Limits

Finally, the transitional provisions retaining the benefit limits which applied up to 6 April 2006 have now expired. Schemes which did not preserve these limits may find that members have become entitled to an unexpected benefit windfall.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.