New UK Pensions Regime About To Begin

by Amanda Banks, Tax-News.com, London

20 March 2006

The UK's Revenue and Customs (HMRC) has summed up the benefits of its new personal pensions regime coming into effect on 'A-Day', 6th April.

Says HMRC: 'On 6 April (A-Day), new simplified rules come into effect around how pensions are taxed, offering simpler and more flexible retirement arrangements. This is what you need to know:

• The many existing sets of rules governing the taxation of pensions will be replaced with a single, universal regime.
• For the first time, everyone will be able to save in more than one pension scheme at the same time.
• There is no limit on the amount of money you can save in a pension scheme or the number of pension schemes you can save in - although there are some limits on the amount of tax relief you can get.
• You will get tax relief on contributions up to 100% of your annual earnings (up to an annual allowance set at £215,000). So if you put £100 into your pension scheme, the tax relief the Government gives you on that is worth at least £28.
• Even if you are not a taxpayer you can still get tax relief on pension contributions. You can put in up to £2,808 in any one tax year and the Government will top this up with another £792 - giving you total pension savings with tax relief of £3,600 per year.
• A-Day will introduce flexible retirement, allowing people in occupational pension schemes to continue working while drawing their pension, where the scheme rules allow it.
• If your scheme rules allow, you can take up to 25% of your pension fund as a tax free lump sum.
• If your pension pot is more than the "Lifetime Allowance" when you come to take your pension you may be subject to a tax charge at that time. But this will only apply if your total pension savings are in excess of £1.5million from 6 April 2006 (rising to £1.8m by 2010/11 and reviewed thereafter).
• Those individuals with larger pensions pots at A-Day will be able to protect their funds from the Lifetime Allowance Charge by completing and submitting the appropriate form to HMRC. They have three years from A-Day to do this.
• The rules on when you can take your pension will change. From 6 April 2010 you will not be able to take a pension before you are 55. There are a couple of exceptions: you will still be able to retire early due to poor health, and if you have the right to retire before 50 at 6 April 2006, that right may be protected.

However, what the Revenue does not mention is that the freedoms that were to have been available to people to self-invest their pension funds have been severely curtailed in the run-up to A-Day. The pre-Budget announcements last year made it clear that the new SIPPs (Self Invested Personal Pensions) regime will not admit fine wines, antiques, classic cars or residential property as permitted assets.

In addition, accounting firm PKF says that new HMRC guidelines encourage tax inspectors to establish whether or not an employee is a ‘close friend’ of the controlling director of a firm before allowing tax relief for pensions contributions made on their behalf.

Under current tax rules, says PKF, it is relatively straightforward for businesses to claim a tax deduction from their profits in respect of pension contributions made for employees. For accounting periods ending after 5 April 2006 (known as 'A'-day) this expense will only be deducted if the business can demonstrate that it is incurred “wholly and exclusively” for a business purpose such as attracting and retaining valued employees.

Peter Penneycard, national director of tax at PKF, said: “This is the latest example of HMRC paring down potential A-day tax advantages before they come into force. Whilst HMRC suspicions are often raised when relatives of the controlling director are employed in a company, how is an inspector supposed to tell which employees are friends of a controlling director? Provided the total cost of the salary package reflects the individual’s value to the company, it should not matter to the company if senior employees choose to be rewarded by means of pension contributions rather than salary.

“If these draft instructions are adopted, the whole area of pension contributions could become a minefield for small companies. At a time when the Treasury is exhorting people to make better provision for their retirement, HMRC should not be deterring employers from making pension contributions. We urge the Government to use the Budget as an opportunity to stop these mixed messages and announce revised guidance.”

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