The changes to pension rules made by the Coalition Government have been many and various. At times the process has seemed to be too fast, while on other occasions implementation has been painfully slow. The end result has been that pension reforms have not happened in one big bang, but take effect from several different dates.
On 6 April 2011, the annual allowance, which effectively sets your maximum tax-efficient pension contributions during a tax year, was cut from £255,000 to £50,000. At the same time a new ‘carry forward’ facility was introduced, which allows you to take advantage of any unused annual allowance from the immediately preceding three tax years. The rules for carry forward are complex.
One key point is that carry forward is a use-it-or-lose-it facility. So if you do not mop up any unused annual allowance for 2008/09 before 6 April 2012, it will be lost forever. The data needed to calculate carry forward can be difficult to obtain, so the sooner you start planning, the better.
From 6 April 2012, the standard lifetime allowance, which effectively sets your maximum tax-efficient total pension benefit value, will be cut from £1.8 million to £1.5 million.
The Government has also introduced some relaxation here in the form of ‘fixed protection’. You can continue to benefit from a minimum lifetime allowance of £1.8 million if you elect for fixed protection. However, there are several hurdles:
- If you already have so-called ‘enhanced protection’ and/or ‘primary protection’, you cannot also opt for fixed protection.
- An election must be made to HM Revenue & Customs by 5 April 2012, which means that the clock is already ticking.
- Broadly speaking, fixed protection will only remain in force provided that after 5 April 2012 no contributions are made to your pension arrangements and you accrue no new benefits.
If you opt for fixed protection, it may make sense to maximise your contributions and/or pension accrual before the end of this tax year – subject to the constraints imposed by the lowered annual allowance.
Flexible drawdown is a new form of income drawdown, under which there are no limits on the level of withdrawals you can take. In theory it became available from 6 April 2011, although as the finalised legislation arrived in mid-July, many providers are only now starting to offer the facility.
To be eligible for flexible drawdown you must have pension income in payment (from the state, pension annuities and/or scheme pensions) of at least £20,000 a year for the rest of your life. In addition, in the tax year in which you opt for flexible drawdown you must not have made or benefitted from any contributions to a money purchase pension scheme, such as a personal pension. You can be a member of a defined benefit (e.g. final salary) scheme during the tax year, but you must stop accruing fresh benefits before opting for flexible drawdown.
If you are thinking of using flexible drawdown in 2012/13, once again you should consider maximising pension contributions in the current tax year.
Flexible income drawdown carries investment risk. If you are concerned by the possible effects the ups and downs in the stock market could have on the level of your withdrawals, an annuity could turn out to be a better option. Flexible drawdown is a complex area of pensions and it is not suitable for everyone. If you are considering this option, you must seek advice.