Even though A-Day, with the introduction of the new pension simplification laws, is more than seven months behind us, we are still finding various twists and turns that were not immediately apparent.
The core legislation has done what it intended and simplified matters. From a pension credit and debit position, we have the situation that the loser of the pension debit will be able to make good that loss while the receiver of the pension credit will have the amount included within their lifetime allowance, currently £1.5m.
Care will need to be taken with pensions where some form of protection, usually for bigger funds, has been put in place or for those clients who have received a particular big credit, where protection can still be put in place, to protect benefits higher than the current lifetime limits.
The freedom to make substantial pension contributions should help businesses make good any pension debit and enable pension sharing to be more acceptable.
In its simplest form, a company can make a contribution on behalf of the director of up to £215,000 a year and seek tax relief from the local inspector. Tax relief under the new simplification laws is not an automatic right as in the past but will be tested under the “wholly and necessarily in the course of the business” rule.
Again, under normal circumstances, contributions by a company for a director in the year of their retirement will be unlimited so the loss of pensions through a pension debit may well be fully recoverable by a contribution from the company, if appropriate, in the year of retirement.
An interesting twist in the legislation is that while in the past life insurance associated with pensions generally ceased at retirement age, as in the case of most company death in service plans, we are now able to provide life insurance cover through to age 75, regardless of when the member retires.
Care must be taken because the ultimate benefit can fall foul of the lifetime allowance. However, the new legislation will allow lump-sum benefits to be payable to nominated beneficiaries, including previous spouses. Of equal interest is the fact that, in the past, income payments have generally been restricted to surviving spouses or dependants. The definition for this has now been extended to include the former spouse.
One of the main problems with the new legislation is the new language. Lifetime and annual allowance have been well documented but now we do not retire, we have a benefit crystallisation event. The tax-free lump sum now becomes pension commencement lump sum. Income drawdown becomes unsec-ured pension which if cont-inued after age 75 becomes alternatively secured pen-sion. Only time will tell if this remains available for all.
An anomaly has arisen over safeguarded rights. Where a member of a pension scheme is contracted out of the state second pension, they accrue benefits generally called guaranteed minimum pension or protected rights. Where a pension credit is transferred out to another individual arrangement, these contracted-out rights become safeguarded rights.
The new legislation allows every individual not only to have access to their contracted-out pension funds from age 50 (55 in 2010) but also to take 25 per cent of the value of their own benefits in the form of a tax-free cash paymentUnfortunately, these new rules do not include safeguarded rights. There is a discussion paper issued by the Department for Work and Pensions and it is hoped that this anomaly will be changed.
At present, it must be viewed that any safeguarded rights will not be available to the former spouse until the age of 60 without the ability to take tax-free cash.
Where an external transfer of a pension credit is required, the excellent low-charging stakeholder pensions can often be one of the best homes to receive the pension credit.
A further White Paper is expected providing more details about the proposed national pension savings scheme which, if implemented, will provide an even cheaper, if somewhat restricted, option.
I am pleased to report that, in line with your own association’s promotion of the new collaboration service, the first courses for financial coaches are available in the New Year. The enthusiasm for this new process is infectious and I am sure it will benefit everyone, most importantly, your clients.
Richard Jacobs is managing director of Richard Jacobs Pension & Trustee Services