Hidden amongst the inevitable ‘small print’ in George Osborne’s most latest batch of reforms to pensions, most of which are due to take effect from 05 April 2015, are some ‘easy to miss’ dangers, for individuals who use ‘money purchase’ pension shares to save for their retirement.
As with most radical reform to regulations there will be a number of unintended consequences, one of which being the potential loss to the Exchequer of revenue from National Insurance, due to individuals age 55 or over electing to be ‘paid’ via their pension fund, rather than by their employer/company.
To combat this and other risks to its income, the Government is introducing a number of so called ‘trigger events’. One of the most significant of these events, should it occur, has a significant impact on the amount that an individual can pay into (or have their employer/company pay into) a pension each tax year, known as their Annual Allowance.
An individual therefore, who having reached the age of 55 decides to take just £1 of income from a pension scheme, after 05 April 2015, will not only see there Annual Allowance reduce from £40,000 per annum to £10,000 per annum (for ever), but will also lose the option to ‘carry forward’ any unused (pension contribution) relief that they may have available to them, for the preceding three tax years.
For an individual who was intending to maximise their pension contributions, say for another 10 years, this could cost them up to £193,500 in ‘lost’ tax relief, for a 45% taxpayer making personal pension contributions, or corporation tax relief of up to £86,000, if contributions are being paid by the individual’s business.
One of the biggest risks however is where individuals receive communications about options for ‘liquidating’ small pension funds directly from insurance companies and fail to seek specialist advice before responding to these. Note, a decision to ‘crystallise’ (take) benefits from a pension policy cannot be reversed.
There is however scope to avoid this particular ‘trigger event’ by consolidating pre-existing pension schemes into an arrangement with the functionality to allow so called ‘flexible (or flexi) drawdown’.
This can allow an individual to receive their so called Pension Commencement Lump Sum, after 05 April 2015, without losing their right to ‘carry forward’ or to continue to contribute up to £40,000 per annum into their pension, however advice from an fee-based, independent, specialist pensions adviser (ideally one with the relevant G60 or equivalent pensions qualifications) will be essential.
The detail contained in these new reforms will enviably be overlooked by individuals and some of their professional advisers, in particular by their Accountants, as well as by financial advisers who do not deal exclusively with pension work, hence you should seek advice now and be very careful not to, albeit inadvertently and most likely unintentionally, pull the trigger.
For further information on how to avoid so called ‘trigger events’ and how to make the most of your existing pension benefits, please contact either Russell Haworth or Andrew Brown for further information, on 01823 286096.