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A  Guide  to  Changes  in  Pension  Legislation  2011

www.wealth-matters.co.uk

1. Foreword

If  you  are  saving  for  your  retirement  using  a  Self  Invested  Personal  Pension  (SIPP)  or  already  taking  benefits  from  one,  it  is   important  that  you  understand  the  changes  in  pension  legislation  that  were  introduced  with  effect  from  6  April  2011.    Although  the  changes  were  suggested  prior  to  The  Budget  of  23rd  March  2011  and  then    came  into  force  on  6th  April  2011,  they  only  became   law  when  The  Finance   (No.  3)  Bill  2010-­‐11  gained  Royal  Assent  on  19  July  and  became  the  Finance  Act  2011.  

After  reading  this  guide,  you  should  have  a  clearer  understanding  of  how  much  you  can  tax-­‐efficiently  contribute  to  a  pension  and  the  rules  governing  how  you  can  take  retirement  benefits  from  your  pension  fund  in  the  future;  the  earliest  being  at  age  55.

Whether   you   are   paying   net   (personal)   contributions   or   gross   (employer)   contributions   or   both,   a   pension  wrapper  is   still  one  of  the   the  most  tax-­‐efficient  ways  to  save   for  the   retirement.    Retirement  planning  is  about  replacing  your  income  at  a  point  in  the  future  so  that  you  can  decide  whether  to  work  or  not.    

In   order   to   give   yourself   the   highest   potential   of   reaching   your   retirement   goal   and   becoming   financially    independent   at   a   chosen   point   in   the   future,   we   recommend   that   you   obtain   independent   financial   advice  subsequent  to  reading  this   guide.    Wealth  Matters  can  help  you  to  formulate  a   bespoke   strategy  and  guide  you  on  the  path  to  financial  freedom.

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2. Key changes at a glance

Annual  Allowance  for  2011/12  changes  to  £50,000  (from  £255,000  in  2010/11)

Introduction  in  2011/12  of  Carry  Forward  of  unused  Annual  Allowance  covering  the  past  three  tax  years

No  requirement  to  take  benefits  or  ‘annuitise’  at  age  75

Alternatively  Secured  Pension  (ASP)  has  been  removed  and  drawdown  can  now  continue  past  age  75.    

Anti-­‐Forestalling  rules  have  been  abolished  (These  rules  restricted  high  earners  with  incomes  over  

£130,000  per  annum  to  contribute  more  than  £20,000  -­‐  £30,000  to  a  pension  plan).

Pension  Commencement  Lump  Sum  (PCLS)  -­‐  the  tax  free  lump  sum  -­‐  does  not  have  to  be  taken  

before  age  75

For  those  individuals  receiving  an  income  as  unsecured  pension  (USP)  before  6th  April  2011,  the  new  

Capped  Drawdown  limits  will  take  effect  on  particular  dates  (see  below  for  further  details)

For  those  individuals  who  who  were  receiving  an  income  under  the  alternatively  secured  pension  

(ASP)  before  6th  April  2011,  the  new  Capped  Drawdown  limits  came  into  effect  from  6th  April  2011.

Capped  Drawdown  allows  you  to  take  an  income  between  0-­‐100%  of  the  calculated  amount.    This  will  

be  recalculated  every  three  years  on  the  review  date  applicable  and  annually  after  age  75.

‘Flexible  Drawdown’  is  available  to  those  who  can  meet  certain  criteria  including  a  Minimum  Income  

Requirement  (MIR)  of  £20,000  (see  below  for  further  details).

Options  relating  to  death  benefits  remain  relatively  unchanged.    However,  the  tax  charge  on  lump  

sum  death  benefits  is  now  55%  (was  35%)  if  you  are  in  drawdown,  of  over  75  (whether  you  are  in  

drawdown  or  not).    Otherwise,  if  you  die  before  taking  benefits  and  are  under  age  75,  it  is  tax  free.

No  Inheritance  Tax  (IHT)  will  apply  to  income  drawdown  funds  (including  after  age  75)

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

The  Annual  Allowance  restricts  the  tax  advantages  of  pension  savings  e.g.  tax  relief  on  contributions  made  by  you  and  contributions  made  by  your  employer  on  your  behalf.  For  the  tax  year  2011/12,  the  Annual  Allowance  is  £50,000  (the  Annual  Allowance  for  2010/11  was  £255,000).

Introduction  of  ‘Carry  Forward’  

If  your  pension  savings  have  been  less  than  £50,000  each  year  over  the  past  three   years,  it  is  possible   for  you  to  carry   forward  unused  allowance  provided  you  were  a  member  of  a  registered  pension  scheme   in  each  of  the  past  3  years.

Please  note:

1. The   Annual   Allowance   for   the   tax   years   2008/09,   2009/10   and   2010/11,   for   the   purposes   of   carry  forward,  is  limited  to  £50,000

2. If  in  an  intermediate   year,  your  pension  savings  exceed  £50,000,  then  any  unused  allowance   from   the  previous  year  will  be  reduced  accordingly.  

3. Exemptions  for  those  with  Enhanced  Protection  will  no  longer  apply4. Special  Annual  Allowance  Charge  (SAAC)  rules  introduced  in  the  Finance  Act  2009  have  been  repealed5. Current  exemption  to  maximise  benefits  in  the  year  of  retirement  is  removed6. Exemptions  to  the  AA  will  only  apply  on  death,  serious  ill-­‐health  or  potentially  major  ill  health7. Tax  will  be  charged  at  the  member’s  marginal  rate,  rather  than  a  blanket  40%8. There  will  be  an  increase  in  the  factor  used  to  calculate  values  of  defined  benefits  from  10  to  16

 For  example:

3. Changes to the Annual AllowanceC

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Here,   the   unused   allowance   is   £30,000;   £10,000  from   08/09   (the   £10,000   excess   from   09/10   is  taken  off   the   unused   allowance   from   08/09),   nil  from  09/10  plus  £20,000  from  10/11  year.

It   is   therefore   possible   to   invest   £200,000   tax-­‐efficiently   into   a   pension,   if   you   have   had   a  registered  pension  scheme  in  the  past  three  years  but   haven’t   contributed   to   it   this   year   or   the  previous  3  years.

In   this   example   your   income   would  have   to   be  £200,000  per  annum  to  claim   tax  relief  on  all  of  the   contribution.    You  can  claim   up  to   50%   tax  relief  on  all  of  this  contribution,  but  your  income  would  have  to  be  £350,000  per  annum  to  do  so.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

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1 4. Taking benefits from your SIPP

Having  built  up  a  retirement  fund  within  your  SIPP  you  will  at  some  point  wish  to  take  an  income   from  it.  There  are  a  number  of  ways  of  doing  this  including:

1. Taking  a  proportion  of  your  fund  (normally  up  to  25%)  as  a  tax  free  lump  sum,  and  either:2. Using  your  remaining  fund  to  buy  an  annuity  from  a  life   insurance  company  of  your  choice  which  will  then  

pay  you  a  regular  income,  or3. Drawing  down  a  proportion  of  your  remaining  fund  each  year  as  an  income  (income  drawdown)

The  changes  mainly   affect  the   third  option.   In  particular  the   level  of  income  you  will  be   able  to  take  each  year.  This  method   of  drawing   income   is   referred   to   as   ‘Capped  Drawdown.’   If   you   can   satisfy   certain  criteria   (see  section  6  below)  you  may  elect  for  an  alternative,  termed  ‘Flexible  Drawdown.’

The  maximum  level  of  income  that  can  be  taken  from  your  pension  fund  in  any  one  year  is  calculated  using  a  set  of  actuarial   tables   provided   by   the  Government  Actuary’s   Department   (GAD).  Under  Capped  Drawdown,   the  maximum  is  100%  of  the  calculated  figure  from  these  tables.  

In  the  past,  maximum  income  based  on  120%  of  the  calculated  figure   from  these   tables  was  available   to  certain  individuals  and  depending  on  your  circumstances  you  may  be  able  to  access   this  higher  maximum  for  a  limited  period.  This  means  that  in  some  circumstances  your  maximum  allowable  pension  may  decrease  and  in  others  it  may  increase.

If  you  meet  the  necessary  criteria,  you  may  decide  to  elect  to  take   income  under  Flexible  Drawdown.  There  is  no  restriction  on   the   amount   of   income   you   can   take   through   Flexible  Drawdown,  subject  to  a  maximum  of  100%  of  your  remaining  fund.   Flexible   Drawdown   payments   like   Capped   Drawdown  payments  are   treated  as  income   so  you  will  be   taxed  at  your  marginal  rate  of  tax.

Other   important  changes   include  ending  the   requirement   to  take  a  tax  free   lump  sum  and/or  commence  drawdown  or  buy  an  annuity  by  age  75.

The GAD tables are found on HMRCʼs website: www.hmrc.gov.uk/pensionschemes/gad-tables.htm

The rates used in the GAD tables are based on 15-year gilt yields on the 15th of the month before the date income withdrawal begins (known as the ʻinitial reference dateʼ), rounded down to the lower

0.25%. Your age and your gender also affect the rate you will get.

HMRC base the income drawdown limits on the equivalent annuity that could be bought from the available fund. The GAD tables therefore show the amount of relevant yearly annuity that can be

provided for every £1,000 of purchase price, depending on age, gender and the appropriate rounded gilt rate.

The same rates apply for protected rights and non–protected rights. The annuity is assumed to be: level, with no guarantee, single life. This amount is called the ʻbasis amountʼ.

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Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

5. Capped Drawdown

Income  Reviews

Reviews  of  the  income  limits  are  now  required  every  three  years  up  to  age  75.  Prior  to  6  April  2011  a   review  was  required  every   five  years,  because  of  transitional  measures   included  in   the   legislation.    The   first   review  after  5  April  2011  may,  in   certain  circumstances,   takes   place  more   than  three   years   in  the   future   (see  below   for  more  details).

After  age  75,  the  review  will  be  undertaken  every  year  with  the  minimum  income  allowable  being  zero.

For   those   subject   to   the   transitional  measures   referred   to   above,   the   Capped   Drawdown   limits   apply   on   the  earlier  of  one  of  the  following  dates:

The  next  5  year  review

The  anniversary  date  following  your  75th  birthday,  or

On  the  next  anniversary  date  following  a  transfer  to  a  new  drawdown  arrangement.

However,  you  can  elect  for  us   to  review  your  income  limit  at  any  anniversary   date  prior  to  the  5   year  review,  at  which  point  the  new  Capped  Drawdown  limits  will  apply.

Those   individuals   in  ASP  before  6  April  2011,  came  under  the  Capped  Drawdown  limits   from  6  April  2011.  In  the  case  of  individuals  who  attained  age  75  on  or  after  22  June  2010,  and  continued  to  take   income  through  USP,  the  Capped  Drawdown  limits  apply  from  the  anniversary  date  immediately  following  5  April  2011.  If  you  were   in  ASP  before   6  April  2011,  please   note   that  Wealth  Matters  will  not  have   automatically  changed  your  current   income  levels  when  converting  you  to  Capped  Drawdown.  If  you  wish  to  change  your  income,  please  contact  us.

New  Government  Actuarial  Department  (GAD)  annuity  tables  for  Capped  Drawdown

New  GAD  tables  have  been  produced  for  the  calculation  of  Capped  Drawdown  with  rates  extending  beyond  age  75   up  to  age  85.  However,   for  ages   up  to  75,   the   rates   are   lower  in  most  cases   than  those   in  the   previous  GAD  tables.  Maximum  income  levels  will  be  calculated  using  these  tables  for  all  reviews  carried  out  from  6  June  2011.

Pension  Commencement  Lump  Sum  (PCLS)

There  are  no  changes   to  the  calculation  for  the  PCLS  (normally  up  to  25%  of  your  pension  fund).  However,  there  is  no  longer  an  upper  age  by  when  this  lump  sum  must  be   taken.  Therefore,  you  can  continue  to  take  up  to  25%  of  your  pension  fund  as  tax  free  cash.

If  you  are  not  drawing  all  of  your  retirement  benefits  you  can  take  a  PCLS  provided  necessary  conditions  are  met.  For  more  information  on  these  conditions  please  speak  to  Wealth  Matters  on  01582  720511.

Standard  Lifetime  Allowance

The  Standard  Lifetime  Allowance  for  the  value  of  your  pension  rights   is  reducing  from  £1.8  million  to  £1.5  million  as  of  6  April  2012.  In  the  event  that  you  defer  taking  your  benefits  until  after  age  75,  a  Lifetime  Allowance  check  will  still  have  to  be  carried  out  at  age  75.

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Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

6. Flexible Drawdown

What  are  the  requirements?

You  will  need  to  meet  the  normal  requirements  to  start  taking  income  withdrawals  from  your  pension  such  as  having  reached  a  minimum  age  of  55  and  you  must  also  satisfy  the  conditions  for  Flexible  Drawdown  including:

1)  You  have  a  minimum  level  of  annual  income  called  the  Minimum  Income  Requirement  (MIR)  of  £20,000  per  tax  year  at  the  time  you  make  the  declaration.  Relevant  income  that  can  be  included  in  MIR  are:

Provided you can meet certain requirements, you may decide to opt for Flexible Drawdown, where it is possible to draw unlimited income from your funds, subject to a limit of 100% of the residual value.

Payments  of  a  lifetime  annuity  from  a  registered  pension  scheme  In  certain  circumstances,  payments  of  a  ‘scheme  pension’  from  a  registered  pension  scheme.  For  more  information  on  the  circumstances  under  which  such  payments  can  be  included  please  speak  to  your  financial  adviser.Payments  under  an  overseas  pension  scheme  which,  if  the  scheme  were  a  registered  pension  scheme,  would  fall  within  one  of  the  above  categoriesPayments  of  social  security  pension  (also  referred  to  as  State  Pension)The  above  pension  or  annuity  will  not  count  as  relevant  income  towards  the  MIR  unless  your  have,  at  the  time  of  making  the  declaration,  already  received  a  payment  from  that  pension  or  annuity.Relevant  income  towards  the  MIR  does  not  include  drawdown  pensionsPayments  you  receive  under  a  dependant’s  annuity  or,  in  some  circumstances,  a  dependant’s  scheme  pension  from  a  registered  pension  scheme,  or  an  overseas  equivalent,  count  as  relevant  income

2) No  contributions  are  paid  by  you  or  on  your  behalf  in  the  tax  year  in  which  the  declaration  is  made  to  any  money  purchase  registered  pension  scheme  other  than  a  cash  balance  scheme.

3) At  the  time  of  the  declaration  you  are  not  an  active  member  of  a  Defined  Benefits  or  cash  balance  registered      pension  scheme.

To  confirm  that  you  meet  the  Flexible  Drawdown  conditions  you  will  be   required  to  make  a   valid  declaration  to  the  Scheme  Administrator.

Other  important  points:

This  valid  declaration  must  comply  with  regulations  made  by  HM  Revenue  &  Customs.

You  cannot  take  Flexible  Drawdown  from  any  Protected  Rights  fund  you  have  built  up  through  contracting  out  of  the  State  Second  Pension  (previously  the  State  Earnings  Related  Pension  Scheme).

Once  you  have  taken  Flexible  Drawdown,  any  new  pension  savings  you  may  make  in  future  tax  years  will  be  liable  to  an  annual  allowance  charge,  which  effectively  cancels  out  any  tax  advantages  of  such  savings.

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Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

7. Taxation and Death Benefits

How  will  income  withdrawals  under  Flexible  Drawdown  be  taxed?

Income  payments  made  under  Flexible  Drawdown  are  subject  to  Income  Tax  deducted  at  source  and  taxed  at  your  marginal  rate.If  you  take  Flexible  Drawdown  and  it  turns  out  that  you  do  not  meet  the  above  requirements,  any  income  taken  in  excess  of  the  normal  maximum  under  Capped  Drawdown  will  be  treated  as  an  unauthorised  payment  and  be  subject  to  additional  tax  charges.

Tax  on  lump  sum  death  benefits

Under  age  75:  There  will  be  no  change  for  those  who  have  not  taken  any  benefits.  Therefore,  any  lump  sum  death  benefit  will  be  paid  free  of  tax,  provided  it  is  paid  within  two  years.Age  75  or  over:  For  those  who  have  not  taken  any  benefits,  there  will  be  a  tax  charge  of  55%.Capped  and  Flexible  Drawdown:  For  those  elements  of  your  fund  in  Drawdown,  lump  sum  death  benefits  will  be  taxed  at  55%  (this  was  previously  35%).  This  rate  applies  at  all  ages  both  pre  and  post  age  75.Unused  drawdown  pension  funds  of  a  member  who  dies  with  no  living  dependants  may  be  donated  to  charity  tax  free

Inheritance  Tax  changes:

No  IHT  will  apply  to  income  drawdown  funds  (including  after  age  75)IHT  anti-­‐avoidance  charges  will  be  removed  if  the  charges  apply  to  registered  pension  schemes  and  qualifying  non  UK  pension  schemes  where  the  individual  omits  to  take  their  annuityIHT  charges  which  may  arise  where  pension  scheme

                   trustees  have  no  discretion  with  regards  to  the                      paying  of  lump  sums  after  the  individual’s                      death  (i.e.  where  amounts  must  be  paid  to                    their  estate)  will  remain  subject  to  IHT

IHT  will  continue  to  apply  to  all  other                      lump  sums  (i.e.  those  in  a  non-­‐registered                      pension  scheme).

N.B. This guide is issued in connection with products and services provided by Wealth Matters Limited. The contents of this guide should not be constituted as advice. Wealth Matters Limited does not accept any liability if the information provided in this document is used for any other purpose. This guide is based on our understanding of current UK legislation and HMRC practice at the date this document was produced.

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We always aim to keep things simple, but should you have any questions relating to any section in this document, please feel free to contact your financial planner at Wealth Matters as per the details below.

Wealth Matters, 727 Capability Green, Luton, Beds, LU1 3LU Tel: 01582 720511 Fax: 01582 730179 www.wealth-matters.co.uk

8. Further changes & Comparison

N.B. This guide is issued in connection with products and services provided by Wealth Matters Limited. The contents of this guide should not be constituted as advice. Wealth Matters Limited does not accept any liability if the information provided in this document is used for any other purpose. This guide is based on our understanding of current UK legislation and HMRC practice at the date this document was produced.

Advance  Notice  of  further  changes  coming  into  effect  in  April  2012:

Money purchase contracting out (including via a personal pension) is to cease – so there will be no more Protected Rights / Non Protected Rights differentiation. The Lifetime Allowance will be reducing to £1.5m (from £1.8m). New “transitional protection” will be introduced for existing clients with funds between £1.5m and £1.8m who would be caught by the reduction in the Lifetime Allowance. Changes to triviality – current triviality is allowed if the aggregate value of a personʼs pension fund(s) (excluding State pensions) is less than 1% of the Lifetime Allowance. Since the Lifetime Allowance is to reduce, the triviality limit will become a fixed monetary limit of £18,000.

Income  Drawdown  -­‐  Comparison  with  previous  rules