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Pensions A-Day Is Coming!

by Robin Pilgrim,, London

15 November 2005

UK pensions will be revolutionized for all individuals and firms on A-Day - 1st April 2006 - but a new survey by Deloittes shows that hardly any companies have yet made plans for the new regime.

The new set of simplified pension rules replaces eight different existing sets of rules. Highlights of the new rules are:

  • The amount that can be contributed to a pension in 2006-07 will rise to a maximum of £215,000. An individual may not contribute more than taxable earnings but tax relief is available on pension contributions of up to 100% of taxable earnings. An employer may make unlimited contributions to fund with full tax relief.
  • The lifetime allowance (LTA), which is the maximum size pension fund that may be held without being subject to a tax surcharge. The lifetime allowance has been set at GBP1.5 million for the tax year 2006-07 and is to rise gradually to GBP1.8m by 2010-11.
  • Any funds taken in excess of the lifetime allowance limit will incur a recovery charge of up to 55% if taken as cash. If the excess is taken as income, there will be a one-off 25% charge, plus tax at the marginal rate on any future income.
  • Protection against these charges is available in two flavours: 'primary' or 'enhanced' protection.
  • Primary protection serves to protect the fund already accrued at A Day and allows it to grow modestly in line with the annual increases in the lifetime allowance, without the fund becoming liable to a recovery charge of up to 55% on the excess. However, if a fund exceeds the relevant lifetime allowance in the year you retire, the recovery charge will have to be paid.
  • Enhanced protection is available to anyone, irrespective of the size of their pension. It not only protects the current value of a fund, but allows protection any future growth in its value, due to future investment returns or pension benefit increases, without incurring a surcharge. But enhanced protection requires a halt to contributions by A-Day.
  • In addition to the higher annual contribution limits (£215,000 in 2006-07), both an individual and the employer can make unlimited contributions to the fund in the year of retirement, although there will only be tax relief on contributions up to 100% of salary.
  • After A-Day, individuals can invest in just about anything, usually via a SIPP (Self Invested Personal Pension). New permitted investments will include residential property, including buy-to-let and holiday homes, jewellery, stamp collections, yachts, vintage wines and cars, and antiques.
  • Such investments will be taxed as a benefit in kind if there is personal use of them and there will be associated costs such as insurance and safe custody if they are kept in storage.
  • Transferring pre-owned property, such as a buy-to-let or holiday home into a SIPP will involve selling the property to the pension fund at its prevailing market value. This may well create a capital gains tax liability; the pension fund will also have to pay stamp duty on the purchase and any bills associated with repair and maintenance of the property.
  • Investments in 'wasting assets' (such as clocks, cars, boats and properties with leases of less than 50 years) will trigger an extra 15% tax, payable by the pension scheme.

Deloitte's partner Bill Cohen said: “Organisations are waiting to learn what their competitors are doing in respect of pension provision before they make a final decision about what changes to offer their own executives. However, time is running out and companies need to urgently agree their post A-Day policies with executives.”

Cash compensation is the most popular alternative benefit and is likely to be used by 73% of respondents to the survey. UURBS and FURBS are being adopted by 27% and 10% respectively. Other options such as employee benefit trusts and family benefit trusts were much less popular.

“Companies will be sensitive to criticism from shareholders that they are continuing with generous pension policies for executives. No one wants to be seen to pay more as a result of A-Day but finding an alternative solution that meets other criteria such as retaining key talent, is not a simple decision” said Orlando Harvey Wood, partner in consulting at Deloitte.

According to new research from Clerical Medical, carried out by IQ Research, the A-day changes are likely to accelerate a trend to contract based group personal pensions schemes.

The syndicated research, conducted by IQ research, looks at the factors which have influenced this shift towards contract based group personal pensions, since the introduction of the Pensions Act in 1995. It reveals 95% of the intermediaries interviewed believe new trustee responsibilities are one of the main drivers for change in smaller occupational trust based schemes.

New changes in pensions legislation on A-Day, including the introduction of more trustee respobnsibilities and member nominated trustees (Mnts), are likely to speed up this shift towards contract based and stakeholder schemes, claims the research. Clerical Medical says this change in attitude will provide intermediaries with an opportunity to review their existing occupational pension scheme arrangements.

The company suggests employers and trustees of occupational schemes should discuss with their adviser whether the scheme still meets their original needs and objectives. It adds that for those who are planning to review their current arrangements, although some employers will choose to stay with their existing trustee based scheme, it may be worth while considering a switch to a contract based group personal plan or group stakeholder plan.

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