The new pension regime begins on 6 April 2006 and from that date, all approved retirement plans become registered pension schemes that are governed by the new rules. There are currently eight different pension regimes allowed by the UK authorities and for some arrangements, the changes will be significant.

Particular retirement strategies that have been devised, either for pension schemes or their individual members, may also require radical change in order to remain effective and able to meet their objectives. For example, after 6 April – “A Day” – it will no longer be possible to carry back member personal pension contributions to set against taxable income of a prior year. Where there are international aspects that require consideration of both UK and overseas legislation, the risk of error becomes greater. If they have any doubts or concerns, pension members and employers are strongly recommended to consult a specialist.

The new regulations, which were enacted in the 2004 and 2005 Finance Acts, allow schemes and members great freedom. Indeed, pension trustees may find the new freedoms so great that they establish scheme limits well inside the new rules. For example, the new regime allows investment in virtually any asset class and those assets may be located overseas. The legislation is unconcerned about such practical matters as the trust establishing effective ownership of the assets.

As the new legislation also allows transactions between connected parties, the assets may already be owned by the pension member. Those assets may be sold to the scheme by the member, or the member may decide to use the assets to make in specie contributions to the pension scheme. All such matters are left to individual scheme administrators to decide.
The government and its agencies will still make fundamental changes if it feels that there is a chance that the legislation will be abused. Direct ownership of individual residential properties is now prohibited, as is land where there is permission to build such dwellings. More esoteric investments are now also considered inappropriate and the Revenue has made it quite clear that it will have no hesitation in using the new pension tax charges totalling up to 70% to penalise transgressors.

Legislation has always been in place to use the UK tax system to set overall boundaries under the new regime. Stepping over those limits causes tax charges to be levied on the excess at a rate of up to 55%. Serious breaches see charges rise to 70%. The following is a list of important limits:

• Annual member contributions are limited to 100% of relevant earnings up to a maximum of £215,000, known as the annual allowance
• The total of registered pension funds may not exceed £1,500,000 for each member, known as the lifetime allowance, the value tested against limits when the pension is drawn
• The lifetime allowance limit includes death in service benefits
• The maximum tax free cash is limited to 25% of the lifetime allowance
• Borrowing in the pension fund is limited to 50% of existing scheme assets
• Lending by the pension fund is limited to 50% of assets, cannot be for a duration of more than five years and must be secured by a first charge
• Investment in the equity of the sponsoring employer is limited to 5% of fund, with a further maximum of three similar investments in connected companies making a total of 20%
• Use of pension fund assets other than to provide retirement benefits is subject to a benefit in kind charge at the rate of 40%.

It should be noted that transfer of a member’s fund to an overseas arrangement that is not recognised by the UK authorities will be deemed an unauthorised payment and will trigger a charge of up to 55% on the value of the transfer. If the value of the transfer exceeds 25% of the total pension fund then de-registration will be triggered.

Some schemes and individual member accounts may already exceed the new limits. For these cases, there are transitional arrangements. For example, any current borrowing may continue as originally planned, but no new arrangements will be allowed until the scheme is within the new limits. More importantly, it is possible to protect positions where the tax-free lump sum benefits are in excess of 25% of the value of the fund.

Where the fund itself exceeds the lifetime allowance, the member may elect for primary protection and so continue as a full scheme member until normal retirement date. The election must be made by 5 April 2009. The member is allowed a proportionately larger lifetime allowance based on the amount of excess that exists at A Day.
For example, a member with a fund value of £3,000,000 at A Day will always have twice the lifetime allowance. Assuming the uplifted lifetime allowance is not breached at retirement, the member may receive retirement benefits of up to 25% of their fund as tax-free cash plus a pension without triggering the excess tax charge of 55%.

Enhanced protection is a second and very valuable transitional relief that allows a member’s pension fund to grow without any reference to the lifetime allowance. However, a member who chooses that option must, after A Day, no longer make or benefit from any contribution to a registered pension scheme. This includes any contributions made to pension life assurance plans and company death in service arrangements. The deadline for election for enhanced protection is 5 April 2009, but in reality many members need to have made the choice prior to A Day.

The new legislation has also stated quite clearly that it will no longer Current rules allow members to utilise income drawdown to defer the purchase of an annuity until they reach the age of 75. In the future, the member has the option to further defer, or even avoid, the annuity purchase by opting for alternatively secured pension (ASP), which is drawdown, but at the maximum rate of 70% of the ruling annuity for a 75-year-old. However, upon death of the member there is no ability for the ASP fund to be returned directly to the family. If there are no further dependants then the fund may either be transferred to charity or to another fund within the same pension administration.

The new pension regime – a ‘threat’ or an ‘opportunity’ – to ensure that you fall into the latter category get your house into order now

The new legislation is a significant change and, it is most important that pension members, sponsoring employers, trustees and administrators review their plans to ensure compatibility. For members, this means consideration of retirement strategies and includes deciding whether to make special contributions before A Day, checking the percentage of lump sum that may be drawn and, in some cases, checking contributions against the new limits. If enhanced protection is considered, check the effect on the level of pension life assurance.

Employers sponsoring company life assurance plans must review the position and ensure members receive benefit statements. Enquiries should be made of trustees and administrators to report any surplus under current rules and plans agreed to eliminate them where transitional protections are required.

There should also be a revision of employment contracts to allow the possibility that bonuses can be paid by the employer directly to the member’s pension fund of choice. Where pension membership includes non-UK nationals and there is the possibility of transfer of pension to overseas schemes, enquiry should be made to ensure the receiving scheme is recognised by the UK authorities. As individuals will be permitted to contribute to more than one registered pension, this allows the opportunity to use a specialist self-invested personal pension plan to hold assets such as unquoted company shares or foreign commerical property. The availability of in specie contributions and transactions with members affords the opportunity to move assets into a pension scheme in a very tax-efficient manner.

The new pension legislation presents considerable opportunity for tax-efficient flexible saving. But there are pitfalls that will prove very expensive unless forward planning is undertaken utilising the services of professionals like FW Stephens Financial Limited.
FW Stephens Financial Limited is authorised and regulated by the Financial Services Authority.

For more information, contact
FW Stephens Financial Limited at:
Tel: +44 020 7251 4434
Website: www.fwstephens.co.uk