Pensions Reform - Again!
On 17 December 2002 the government published its long awaited Green Paper on Pension Reform and the Inland Revenue published its Pension Simplification Review. The target date for the introduction of the reforms is 6 April 2004. Based on previous experience of similar processes this appears challenging to achieve.
There are currently eight different tax regimes governing pensions in the UK. The government proposes to replace them with a single tax regime that will apply to all approved pensions. The main proposals are summarised below.
- A ‘lifetime limit’ on an individual’s total pension fund of £1.4 million. This will be tested at the point when benefits are drawn and the limit is expected to be increased each year in line with inflation. If the lifetime limit is exceeded, a 33% ‘recovery charge’ will be applied to the excess.
- Annual personal pension contributions will be restricted to the higher of £3,600 or 100% of earnings. In addition there will be an overall annual limit of £200,000 imposed on inflows of value to an individual’s pension fund - both contributions and growth in pension rights in occupational schemes.
- Flexible retirement arrangements will allow individuals to draw benefits whilst remaining in employment. This should allow a more flexible and gradual approach to retirement although the minimum age at which benefits can be taken from a pension will be raised from 50 to 55 by 2010.
- The maximum tax-free lump sum will be 25% of the accrued fund.
- Subject to the fund and contribution limits, individuals will be free to contribute to as many different pension arrangements as they wish.
- The ability to pay a contribution in the current tax year and ‘carry back’ the relief to the previous year will be abolished.
There are a number of areas where no changes are proposed:
- no change to tax relief at marginal rate on contributions
- no change in the taxation of pension scheme investments
- no change in the taxation of pensions received
- no change to the state pension age for men which stays at 65 although for women, as previously announced, there will be a move from 60 to 65 in stages.
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Fundamentally the government wants to simplify pension provision in the UK and encourage people to make better provision for their retirement. However, market confidence continues to be knocked by ‘scandals’, investment returns and annuity rates have dropped substantially and defined benefit schemes are failing to live up to expectations. Against this background, the government has a tough job on its hands. Having said all of this, the single biggest challenge facing the government is that the average individual in this country is either not contributing to a pension at all or contributing too little too late.
We will continue to keep you informed of developments in this area. In the meantime if you have any questions please get in touch.