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Baigrie Davies Blog
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Here we go again... earlier this month the draft legislation details were published, implementing the proposals previously outlined in our October blog.
Summary of the changes
- There will be no obligation to purchase an annuity – ever
- £50k pa fully relievable pension contributions
- Ability to pick up "missed" contributions over previous 3 years to the £50k each year
- Reduced lifetime allowance of £1.5m but there is the ability to protect funds within the £1.5 - £1.8m band
- No action needed for those with enhanced and/or primary protection
- Less tax for beneficiaries to pay on inherited pension funds post 75
- But death pre 75 when in drawdown tax increased from 35% to 55%
All changes, bar the changes to the Lifetime allowance, are due to take effect from 6th April 2011, which is soon!
We broadly welcome these new rules with the greater flexibility they provide. We just hope they remain in place long enough to allow for sensible financial planning.
Outside of the summary above there’s alot of further detail to digest. There is additional information below for those who wish to read further. As ever please do not hesitate to contact your Baigrie Davies adviser for further details.
Age 75
In general, references to age 75 will disappear from the pension regime. There are a few areas where it remains relevant, some of the specifics are beyond this blog so contact your adviser for further details.
However from 6th April 2011:
- There will be no need to annuitise at any age.
- Tax free lump sums will be allowed beyond age 75.
- Tax relief on pension contributions will still only extend to age 75
Drawing an Income
Capped Drawdown replaces Unsecured Pension (USP) and Alternatively Secured Pensions (ASP).
- The new Capped Drawdown regime will allow annual withdrawals between zero and 100% of the basis amount (GAD maximum), which is broadly in line with the amount that an annuity would pay. The current upper limits are 120% pre age 75 and 90% after age 75.
- This new limit will be reviewed every three years before age 75 (rather than every five years) and every year after age 75.
- For those currently in USP or ASP, the change to the new limits will occur at their next review or from 6th April 2011, respectively.
Individuals will be allowed to take withdrawals above the Capped limit. This is to be know as flexible drawdown. However this is only on the basis that the individual can meet;- A ‘Minimum Income Requirement’ of £20,000 a year, accumulated from other pensions (including basic state pensions, and scheme pension/dependants pensions).
- No tax relief will be granted on any pension contributions made once in flexible drawdown.
Lifetime Allowance
As highlighted in the October blog the lifetime allowance will be reduced from £1.8m to £1.5m from April 2012.
Thankfully the Government recognised that there would be individuals who had continued to build pension rights in the expectation of a Lifetime Allowance of at least £1.8 million and as such they could be significantly affected by the reduction in the Lifetime allowance.
Clients effected, who are not registered for Primary or Enhanced Protection, will now be able to apply for what is known as fixed protection.
Although the relevant form is not yet available from HMRC they have confirmed that the application needs to be made before 6 April 2012. From this date, pension contributions must cease.
Anyone with existing primary or enhanced protection arising from ‘A’ day will continue to be unaffected.
Lump sum death benefits
If an individual dies before age 75 without taking a pension then a death benefit lump sum can be paid out to dependants, tax-free. However in all other cases, namely
- An individual dies after age 75 and / or
- After having taken benefits from the pension fund.
The lump sum death benefits will be subject to a new 55% tax charge.
Piers Larcombe
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For those of our clients heavy in cash and who have £50,000 pots spread across a number of institutions, the New Year brings you some welcome news.
The limits on the Financial Services Compensation Scheme (FSCS) for deposit holders will increase.
Firstly a quick recap on the current rules
· The current FSCS limit for deposits is the higher of £50,000 or €50,000 per person per firm.
· In the event of default, the Euro amount will be calculated by reference to the currency exchange rate on the day of default.
· Investors with different accounts should check that all the funds belong to separate companies. If they operate under the umbrella of the same company, then only one compensation limit will be applicable.
· Depending on the severity of the failure and somewhat unlikely give recent history but depositors could still receive a share of their savings above this limit following any distribution of assets as part of the insolvency process for a failed bank.
New Limits from 1st January 2011
The limit will be increased to the pound equivalent of €100,000. At the time of writing this equates to £84,666.
Further information on the FSCS can be found on the following link http://www.fscs.org.uk/
Piers Larcombe
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