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Personal Pension Schemes
The Inland Revenue has simplified the tax treatment of pension schemes. Although this might seem to be good news in fact, it means that they have made it more complicated. The following gives a summary of the new regime. If any of this causes concern please contact us so that we can advise on the best way forward. If you have existing arrangements there are transitionary provisions which may be useful. This page is purely designed to give an overview and certainly is not intended to be definitive and simply outlines the limits.
Contributions
Anyone resident in the UK and under age 75 can contribute £3,600 a year up to a maximum of their earnings during the year and get tax relief on those contributions. Additional contributions may be made without tax relief. See Annual Allowance, which effectively restricts contributions.
Annual Allowance
Everyone has an annual allowance, which in tax year 2008/9 is £235,000. Tax relief will not be given above this limit. For money purchase arrangements this is the total of all contributions made in respect of the member including employer contributions. For final salary benefits it is the increase in the value of the benefits calculated on a specified basis. Contributions in excess of the Annual Allowance will not get tax relief and in addition members will be subject to a personal tax charge at the rate of 40% on the excess over the annual allowance.
Lifetime Allowance
Subject to any transitionary provisions everyone has lifetime allowance which is currently (2008/9) £1,650,000. For money purchase it is the value of the fund. For defined benefits this is 20 times the pre-commutation pension. This is based on standard benefits. For some defined benefit schemes a higher multiple may apply. This is a total for all pension arrangements including arrangements where a pension is already being taken. Special provisions apply to the valuation of these. Where benefits are taken from different arrangements over a period of time they will progressively absorb this lifetime allowance. Benefits in excess of the lifetime allowance will be subject to tax at 35% if taken as a taxable pension or 55% if taken as a lump sum.
On Retirement
Pension benefits need to commence before age 75 and in general the tax rules mean that an annuity must be purchased before that age. Although there is provision to have an alternatively secured pension after age 75 the tax rules make it unattractive in most cases. Before age 75 the pension element can be taken either, as a lifetime annuity, a temporary annuity while retaining a fund for later annuity purchase or by taking income withdrawal from the fund.
Generally at retirement a quarter of the fund can be taken as a lump sum tax-free but the rest must be taken as pension in one of the forms mentioned above.
Death Benefits
Before retirement lump sum death benefits can be paid tax-free. After retirement, or in Inland Revenue terms crystallisation, any benefits on death are taxed at 35%. If a member defers taking an annuity until after 75 and dies the tax consequences are more penal.
Inheritance Tax
There is no general exemption from Inheritance tax although the normal provisions taxing trusts do not apply to pension schemes and the distribution of a lump sum will not generally produce an Inheritance tax charge, particularly where it is paid under discretionary trusts. However, if you are ill and decide to defer your pension the Inland Revenue can make a charge if you subsequently die having not commenced taking a pension.
If you defer your pension past age 75 and take an alternatively secured pension then on death there will be an Inheritance tax charge as there may be if there is a payment made when a dependants pension ceases.
Contributions
Anyone resident in the UK and under age 75 can contribute £3,600 a year up to a maximum of their earnings during the year and get tax relief on those contributions. Additional contributions may be made without tax relief. See Annual Allowance, which effectively restricts contributions.
Annual Allowance
Everyone has an annual allowance, which in tax year 2008/9 is £235,000. Tax relief will not be given above this limit. For money purchase arrangements this is the total of all contributions made in respect of the member including employer contributions. For final salary benefits it is the increase in the value of the benefits calculated on a specified basis. Contributions in excess of the Annual Allowance will not get tax relief and in addition members will be subject to a personal tax charge at the rate of 40% on the excess over the annual allowance.
Lifetime Allowance
Subject to any transitionary provisions everyone has lifetime allowance which is currently (2008/9) £1,650,000. For money purchase it is the value of the fund. For defined benefits this is 20 times the pre-commutation pension. This is based on standard benefits. For some defined benefit schemes a higher multiple may apply. This is a total for all pension arrangements including arrangements where a pension is already being taken. Special provisions apply to the valuation of these. Where benefits are taken from different arrangements over a period of time they will progressively absorb this lifetime allowance. Benefits in excess of the lifetime allowance will be subject to tax at 35% if taken as a taxable pension or 55% if taken as a lump sum.
On Retirement
Pension benefits need to commence before age 75 and in general the tax rules mean that an annuity must be purchased before that age. Although there is provision to have an alternatively secured pension after age 75 the tax rules make it unattractive in most cases. Before age 75 the pension element can be taken either, as a lifetime annuity, a temporary annuity while retaining a fund for later annuity purchase or by taking income withdrawal from the fund.
Generally at retirement a quarter of the fund can be taken as a lump sum tax-free but the rest must be taken as pension in one of the forms mentioned above.
Death Benefits
Before retirement lump sum death benefits can be paid tax-free. After retirement, or in Inland Revenue terms crystallisation, any benefits on death are taxed at 35%. If a member defers taking an annuity until after 75 and dies the tax consequences are more penal.
Inheritance Tax
There is no general exemption from Inheritance tax although the normal provisions taxing trusts do not apply to pension schemes and the distribution of a lump sum will not generally produce an Inheritance tax charge, particularly where it is paid under discretionary trusts. However, if you are ill and decide to defer your pension the Inland Revenue can make a charge if you subsequently die having not commenced taking a pension.
If you defer your pension past age 75 and take an alternatively secured pension then on death there will be an Inheritance tax charge as there may be if there is a payment made when a dependants pension ceases.