HM Revenue & Customs pension tax rules
From 6 April 2006, as part of the Finance Act 2004, a new set of tax rules covering all existing and new pension arrangements was introduced.
Amongst the changes introduced were two main allowances for pension savings; the annual allowance and the lifetime allowance.
The annual allowance limits the amounts of pension 'growth' you can achieve in a tax year before any tax charges would become due. We think it is unlikely that this would have any impact on members of the Wiltshire Pension Fund, as the factors which might lead to the limit being exceeded, such as the level of increases in pay, additional contributions paid etc. during any financial year, would have to be extremely large.
The lifetime allowance is a threshold up to which the value of any accrued pension benefits (from all pension arrangements) can be received without suffering a tax charge. It is, however, important to understand that your annual pension will be subject to income tax under PAYE in the normal way. The Government had originally published the lifetime allowance for each tax year up to 2010/11. At the outset in 2006/7 it was set at £1.5 million, rising to £1.8 million by 2010/11.
(Note :As part of the Government's recent pre budget review, the Chancellor announced that the standard lifetime allowance would be frozen at the level of £1.8m for a further five year period, from 6 April 2011 to 5 April 2016.)
The method of valuing your pension benefits against the lifetime allowance is to multiply your annual pension by 20 and then add your lump sum. If you also have a pension that was already in payment on 5 April 2006, the calculation for that benefit is 25 x annual pension (and any lump sum already received is ignored) and this is added to the earlier calculation of the value of benefits not in payment.
You may be affected by the introduction of the lifetime allowance, either from 6 April 2006, or at some point in the future, as the value of your benefits might have exceeded the initial £1.5 million limit or you might expect it to exceed the Standard Lifetime Allowance at some future date. Following the Government's announcement to freeze the level of the standard lifetime allowance at £1.8m until 5 April 2016, this may now become more of an issue. The Finance Act does provide some forms of transitional protection that can reduce or extinguish the level of tax charge you may eventually have to pay if the new rules will affect you. These are known as primary and enhanced protection.
Primary protection is aimed at providing some level of protection to those higher earners who had benefits as at 5 April 2006, the capital value of which exceeded £1.5 million at that time. It could also benefit those individuals with significant pension benefits held in other pension schemes (the Armed Forces for example) where the combined value of all pension rights exceeded £1.5 million as at 5 April 2006. Primary Protection provides you with an individual lifetime allowance based on how much your benefits at 5 April 2006 exceeded £1.5 million at that time. If, at retirement, your personal lifetime allowance is exceeded then tax charges become payable on the excess.
Enhanced protection works in a slightly different way. You can apply for enhanced protection even if your benefits as at 5 April 2006 did not exceed £1.5 million at that time. It may be a useful form of protection should you believe that the value of your pension benefits might exceed the standard lifetime allowance at the time you retire. With this form of protection you will not pay tax on benefits in excess of the standard lifetime allowance, provided your benefits at 5 April 2006 do not increase beyond certain limits (known as relevant benefit accrual). If the relevant benefit accrual limit is exceeded, you will pay tax on the excess.
There is a deadline by which you must apply for either primary or enhanced protection (or both). If you think you might benefit from either form of transitional protection you need to register your intentions with HM Revenue & Customs by no later than 5 April 2009. The form enabling you to do so (APSS200) can be found at http://www.hmrc.gov.uk/pensionschemes/protection.htm.
If you think you have or are going to exceed the annual allowance and/or might benefit from either primary or enhanced protection we recommend that you speak to an Independent Financial Adviser.
Wiltshire Pensions Fund, County Hall,Trowbridge, Wiltshire, BA14 8JJ.
© 2007 Wiltshire Pension Fund.