Although neither the commencement date nor the finalised rules have been made in respect of the new simplified tax regime there are a number of areas where clients will be seeking advice.
The introduction of the new simplified tax regime will not greatly impact on the vast majority of clients whose retirement fund is never likely to exceed the Lifetime Limit. These clients should continue with their current pension provision, perhaps considering an increase in their contributions where they can afford this.
However, where an individual's retirement fund already exceeds the proposed Lifetime Limit (ie £1.4 million at outset), or could easily do so before or after the proposed implementation date (A-day) of the new regime, he/she will be seeking advice on what contributions/pension benefits he/she should be paying/establishing now.
Where a member's fund exceeds the Lifetime Limit, a recovery tax charge will be levied on the excess as well as an income tax charge which could result in an effective rate of 60% tax on the excess. Members will clearly wish to avoid such a charge. The Inland Revenue has introduced some transitional arrangements for members whose retirement fund at A-day already exceeds the Lifetime Limit. Such fund can be registered with the Inland Revenue and will be subsequently indexed. The retirement benefits secured by these indexed registered assets will not be subject to any recovery tax charge even if they exceed the indexed Lifetime Limit at that time.
As a result of the above it would appear that where an individual's retirement fund already exceeds the Lifetime Limit he/she should be advised to maximise their contributions (as permitted by the rules of their current pension regime) prior to A-day so that by A-day they have increased their registered assets to the greatest degree. This may not, however be a wise recommendation. Much will depend on how the Inland Revenue decide to index the registered assets at A-day. If the Inland Revenue only decide to revalue such assets in line with the RPI but the assets grow by more than that amount an excess tax charge could potentially apply to the difference between the actual value of the assets at the time retirement benefits are taken and the indexed registered assets at that time. For example, a member had benefits in a SSAS valued at £2 million at A-day and draws his benefits 10 years later. By that time the value of his SSAS benefits had grown go £3 million but his indexed registered assets were only £2.5 million. This could result in a tax charge of up to an effective rate of 60% (in current terms) on the excess £500,000 fund. In such a case it seems unlikely that a client would welcome the payment of further contributions (or provision of additional pension benefits) pre A-day which have resulted in an increased excess tax charge.
It is unlikely we will know how the Inland Revenue intends to index registered assets until they issue their further consultation paper in late summer/early autumn, and any recommendations concerning planning for the new regime may be best left until after then.
Members with funds of just less than the Lifetime Limit may be tempted to increase their funds at least to that level by A-day, as this will give some protection to the fund as registered assets - fund levels of less than the Lifetime Limit at A-day cannot be registered with the Revenue. Once again details will be required of the basis for indexing of registered assets before advice can be given.
Other areas where clients may require advice are:
- tax-free cash. Although it seems likely that the new regime will permit larger tax-free cash sums for most existing scheme members some members may be able to take advantage of the special transitional terms so that their tax-free cash accumulated at A-day can be registered and protected. Once again full details are not yet known how an "exact valuation" of a member's tax-free cash sum under an existing scheme will be determined. Until this is available it will be difficult to advise individuals.
- income withdrawal. Members already taking income withdrawals, or about to do so, may want to know how this will fit in with the new "value protection" basis of death benefit due to be introduced under the new regime.
One area which should be considered by all members of existing schemes is whether their scheme continues to meet their requirements. Once the new simplified tax regime is introduced all schemes will be subject to the same tax rules which will place the emphasis on the terms and charges of such schemes. Where a scheme provides outmoded benefits (e.g. perhaps no return of fund on death) consideration should be given to whether it should be replaced with a more up to date arrangement that better meets the clients needs. However, there will be many aspects to consider in any such analysis, including:
- what "exit" charge is levied by the member's scheme (e.g. loss of terminal bonus, capital unit penalty etc)
- what new charges will be levied by any new plan
- will the proposed new plan offer a full range of investment options?
- does the old plan offer guaranteed annuity rates? If so, will the member be able to take advantage of them?