Planning for retirement
These are difficult times for pension scheme members and employers which fund the schemes. Recent surveys have revealed that the black hole in private company final salary schemes now exceeds £1 trillion, and that almost a quarter of employees aged over 55 now expect they will have to work beyond the state pension age of 65.
Chris Lee, Head of Business Tax at Thames Valley accountants James Cowper LLP, sets out some recent changes to pension rules, but also believes there remain pension planning opportunities for those fortunate enough to be able to fund private pensions.
A new pension regime was introduced in 2006, one feature of which was the ability to draw 25% of any pension fund as a tax free lump sum after the age of 50. This remains possible, even if the person concerned continues to work. However, from 6 April 2010, the age limit increases to 55, which means that some scheme members have a decision to take before that date. Take for example somebody who reached 50 on 1 September 2009. He can take his 25% lump sum now or at any time before 6 April 2010- but if he doesn’t do so, the next opportunity won’t arise until his 55th birthday on 1 September 2014. In practice, most people choose not to take the lump sum at the earliest opportunity, but those who are affected should not overlook this potentially important deadline.
One of the shock announcements in the recent Budget was of a new 50% tax rate to apply from 5 April 2010 to those with annual income of over £150,000. Coupled with that was an announcement that, from 6 April 2011, higher rate tax relief on pension contributions will be restricted for people with income exceeding £150,000. The full impact will be felt by those with annual income exceeding £180,000, who will receive only 20% tax relief.
An obvious solution might have been to increase pension contributions before April 2011 and claim higher rate relief. Unfortunately, there are highly complex “anti-forestalling” rules designed to counteract this. For most people with income of over £150,000 in the current or two previous tax years, a maximum contribution of £20,000 will attract higher rate tax relief (or such higher amount as has historically been paid by quarterly or more frequent regular contributions). Contributions in excess of the maximum will attract only 20% tax relief.
For those likely to be affected by the anti-forestalling rules, professional advice is probably desirable. However, for someone with annual income of, say, £100,000, the rules will not apply and it may make sense to maximise pension contributions before April 2011 to be sure of gaining higher rate tax relief.
Despite the pension changes, pension schemes remain a valuable part of tax and retirement planning. James Cowper’s experience is that many people are very uncertain over what is in their pension pot, and can often benefit from a review. Pension funds managed by insurance companies frequently offer very poor returns, and appointing a discretionary fund manager can make a big difference. And selling assets, such as a share portfolio or commercial property, to your own pension scheme can be a good way of unlocking cash with little or no tax to pay.
Please feel free to contact Chris Lee on 0118 959 0261 or email: clee@jamescowper.co.uk