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Proposed Simplified Pensions Regime - Aide Memoire

Proposed date of implementation - 6th April 2006

The table below is based upon our current understanding of proposed legislation and should not be treated or relied upon as a statement of law or proposed law. Suitable advice should be sought on any particular aspect before any action is taken.

Source: Simplifying the taxation of pensions: the Government¿s proposals December 2003. Budget Announcement 17/03/04. Finance Act 2004.


LIFETIME ALLOWANCE (LTA)
  • £1.5m reviewed every 5 years
  • Pre-set indexation until 2010
  • DB rights valued at £20 capital for every £1 in pension (20:1)
  • Pensions in payment valued at £25 capital for every £1 of pension
  • Income drawdown in payment based on maximum income level
ANNUAL ALLOWANCE
  • £215k, reviewed every 5 years
  • Pre-set indexation until 2010
  • Annual allowance = all contributions to DC schemes & annual increase in any DB rights
  • Annual increase in DB rights valued at £10 capital for every £1 of pension increase
  • Excludes NI rebates
  • Excludes personal contribution over 100% of earnings
PENSION AGE
  • Minimum age 55 from 2010
  • OPS members must have contractual right at 09/12/03 to be able to take benefits from age 50
  • Special occupations with low NRD have 2.5% reduction to LTA for each
  • year before age 55
TAX FREE CASH
  • Maximum 25% of funds below LTA
  • Transitional protection available
  • Protected rights funds included in total (TFC not taken from PR fund)
CONTRIBUTIONS
  • Unlimited personal & employer contributions
  • Personal: higher of £3,600 or 100% of UK earnings qualify for tax relief
  • Employer: tax relief unlimited but individual taxed at 40% if annual allowance exceeded
  • Individuals may contribute to schemes on behalf of the member
SCHEME INVESTMENTS
  • Single set of rules for all schemes
  • Penion schemes allowed to invest in a wider class of investment type
  • Pre A-Day investments subject to rules in force at that time
  • Pension benefit in kind charge on assets used by member or associates
  • Rules on wasting assets
RECOVERY CHARGE
  • Excess funds taken as cash = 55%
  • Excess funds taken as pension = 25% (plus taxed as income at members marginal rate)
UNSECURED INCOME (PRE 75)
  • A minimum income level must be taken each year
  • Maximum income is 120% of flat rate, single life annuity on open market
  • Maximum reviewable every 5 years
  • Term certain annuities: maximum 5 year term
  • Term certain annuity included in maximum withdrawal amount
  • Must end before member's 75th birthday
ALTERNATIVELY SECURED
INCOME
  • Available from age 75
  • A minimum income level must be taken each year
  • Maximum income is 70% of flat rate, single life annuity on open market for 75yr old
  • Reviewed annually
  • On death, remaining funds must first secure dependants pensions
SECURED INCOME
  • May offer two types of death benefits
  • Value protection: payment before 75 of initial capital less pension payments, taxed at 35%
  • Guarantee period: pension schemes may offer up to 10 year guarantee from date of vesting
DEATH BEFORE VESTING
  • Any lump sums pre 75 tested against LTA
  • Value of dependants` pensions not counted towards LTA
  • Excess over the LTA is taxed at 55%
DEATH AFTER VESTING
  • Unsecured income before 75: lump sum taxed at 35%
  • Secured income: maximum 10 year guarantee period or value protection taxed at 35%
  • Dependants` pensions maybe taken as unsecured income
  • No lump sum death benefits available post 75
PENSION SHARING
ARRANGEMENTS
  • Pension credits count towards LTA
  • Pension debits do not count towards LTA
  • Register pre A - Day pension credit rights
TRIVIAL COMMUTATION
  • Must commute in one single 12 month period
  • Between 60 & 75
  • Must commute all benefits from scheme or annuity
  • First 25% tax-free if under LTA, 75% taxed as income
  • Maximum 1% of LTA across all contracts
  • Total amount of all pension benefits must be below 1% of LTA
ILL HEALTH COMMUTATION
  • Allowed for all schemes
  • Benefits may commence before minimum pension age
  • Subject to satisfactory medical evidence being provided
PRIMARY PROTECTION
  • Only funds over £1.5m can register
  • Expressed as % of LTA
  • Fund indexed in parallel with LTA up to date benefits taken
  • Available to members in pensionable service at A-Day
ENHANCED PROTECTION
  • Must cease pensionable service & any contributions to registered schemes
  • Can register funds below £1.5m
  • All benefits exempt from recovery charge
  • DB rights: salary capped at 1/14th of LTA, if already subject to earnings cap
  • Can be revoked, revert to primary protection (only funds over LTA as at A-Day)
PRE A-DAY RIGHTS TO TAX FREE CASH (TFC)
  • If registered for primary protection & over £375,000 TFC, TFC increased at same rate as increase to LTA
  • If registered for enhanced protection & over £375,000 TFC, TFC is same % of fund at vesting as at A-Day
  • Where members rights over 25% but not registering fund, TFC isrelevant % increased in parallel with LTA.
  • Tax-free cash rights lost if transfer out of registered scheme



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