Penal rates putting the pain into pensions
Retirement planning
URGENT A-DAY DEADLINE 5 APRIL 2009
You have until 5 April 2009 to
register for Transitional Protection of
your pension rights accumulated pre
A-Day (which was 6 April 2006) This
is a once in a lifetime opportunity.
Please feel free to contact us if you
think you should be registering.
Please act NOW or you risk being
subject to the LTA Charge.
ANNUITIES
Annuities hit 5 year highs during
2008 and, whilst rates have begun
to reduce since September, annuities
still offer, in our view, reasonable
value. We don’t anticipate rates
increasing in the medium to long
term. Worth a closer look?
The announcement in the Pre-Budget Report that both the Lifetime Allowance (LTA) and the Annual Allowance (AA) will be frozen at 2010/2011 levels for five years until April 2016
represents a further snipping away at the pension benefits of individuals who the Government considers to be ‘fat cats’.
An increasing number of diligent pension savers will get caught by the Lifetime Allowance Charge which is 55% income tax on pension valuations over the LTA, currently £1.65m, where excess benefits are taken as a lump sum. Further, and crucially, pension income at the LTA limit could be insufficient to meet your lifestyle objectives in retirement. Now is the time to start planning.
Let me illustrate this by way of an example: Let us assume that Bob is retiring in April 2010 on his 60th birthday. He has accumulated a pension fund of £1.8million; the level of the LTA in tax years 2010/2011 to 2015/2016. Bob decides to draw 25% (£450,000) of his fund as tax-free cash and purchases an annuity linked to increases in Retail Price Index (RPI) with the remaining fund (£1.35m) (as he is concerned about future inflation) and with a two-thirds
widow’s pension for his wife, Joan. Bob’s pension is £43,800 in the first year. Quite a drop from his earnings of £100,000. You will note that Bob just becomes a higher rate tax payer at this level of his pensionable income. If we now go forward in time to 1 April 2016 and Bob’s friend, Jack, has a pension fund of £1.8m and buys his annuity on exactly the same terms as Bob. However, by then an income of £43,800 would be worth only £36,700 in real terms, a
reduction of about 16%. Any amount greater than this will be subject to a penal rate of tax. The government believes that any pension fund over the LTA should be subject to a penal rate of income tax to claw back ‘excess’ tax relief. Do you think Jack will feel like a ‘fat cat’? I’m not sure he will.
It is now increasingly important to review your pension and non-pension savings to assess whether your pension funding is at a sensible level to avoid these LTA issues and whether your overall savings levels are sufficient to reach your desired lifestyle goals in retirement. For independent financial advice to assist you in reviewing your plans please contact your usual Relationship Manager or call us directly on 020 7184 7930.
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