Changes to pensions
The state pension
The current basic state retirement pension is £107.45 per week. The Chancellor announced an increase of 2.5% from April 2013, which will see the weekly rate rise to £110.15. The additional state pension (together with some other benefits, particularly for the disabled) will continue to be increased in line with inflation.
Tax relief on pension savings
Low state pension rates and the availability of significant tax reliefs have encouraged many people over the years to save in pension plans: company pension schemes, group personal pensions or individual personal pensions. For high earners, maximising pension savings has been a part of sensible tax and retirement planning. For some people, an effective tax relief of 60% is achievable before 6 April 2013.
In the past, tax relief on pension savings was limited by capping tax relievable contributions at a percentage of earnings. In more recent years, the Government has set a limit on annual and lifetime pension savings, beyond which tax advantages are, in effect, clawed back. For the current tax year, and for 2013/14, the annual limit is £50,000 gross (the charge is at your marginal income tax rate), and the lifetime limit is £1.5 million (with a charge at 55% on excesses drawn as lump sums, 25% where excesses are drawn as pension). Care must be taken, therefore, and it is particularly important to note that the Annual Allowance applies to the 'pension input period' (PIP) ending in the tax year - you may already be in your 2013/14 PIP.
- The Annual Allowance is reduced to £40,000 with effect from 6 April 2014 (so PIPs ending in tax year 2014/15). Unused allowance brought forward from earlier years (i.e. years up to 2013/14) will continue to be based on the £50,000 Annual Allowance
- The Lifetime Allowance is reduced to £1.25 million with effect from 6 April 2014 (so affecting those taking pension benefits starting in 2014/15). Fixed and (perhaps) personalised protection options will be available, the latter offering scope for continuing savings with only the eventual fund excess over the greater of £1.5 million and the then-standard lifetime allowance subject to charge
- A transitional rule will apply for cases where death occurs up to 5 April 2014 but death benefit is not drawn until after that date, with the charge being made by reference to the lifetime allowance as at the date of death
- The capped drawdown limit for pensioners of all ages will increase from 100% to 120% of the value of an equivalent annuity.
For the purpose of the Annual Allowance Charge on money-purchase schemes and most personal pension plans, the measured value is the gross amount contributed to the PIP by the individual and, if applicable, the employer. As regards defined benefit schemes, one looks at the year's increase in benefit.
For the Lifetime Allowance Charge on money-purchase schemes and pension plans, the measured value is the value of the fund when benefits are taken. For defined benefit schemes, it is 20 times the annual pension rate plus the value of any lump sum drawn.