Date of issue: 25th February 2004

Beware Proposed New Rules On Pension Provision

The Government's proposed new simplified regime for taxing pensions, which is designed to increase choice and flexibility, requires careful scrutiny as it will undoubtedly disadvantage some taxpayers, warns chartered accountants Clement Keys, Birmingham.

On A-day - 6 April 2005 - the current eight different tax regimes governing pensions will be replaced with a single set of rules designed to encourage individuals to save for retirement and employers to sponsor company pensions. The new regime will also incorporate a single consistent set of rules covering how pension savings are translated into retirement benefits for both private pension plans and company schemes.

"Although the new tax regime retains our traditional, voluntary approach to pension provision and pension rights accrued prior to the proposed reform will be respected, the onus will be firmly on taxpayers to decide when and how much to save to secure the retirement income they want," says Phil Cook, partner and head of the specialist taxation division at Clement Keys, Birmingham.

Whilst there are a number of key proposals, the new lifetime limit is likely to effect many who have built up a substantial fund via long term contributions or property investment.

The new Lifetime Limit will govern how much can be saved into a pension. Based on the value of the pension fund at retirement, not contributions, this limit will be set at £1.4 million upon introduction and indexed thereafter. Tax relief at the contributor's marginal rate will continue to be available.

Anyone whose retirement fund already exceeds the Lifetime Limit, or is likely to do so immediately before or after A-day, should seek professional advice about maximising their pension contributions.

"Before the new legislation comes into effect we would advise individuals to investigate whether they would be better off paying contributions or, if eligible, taking their retirement benefits," adds Phil Cook.

Individuals will also require advice about tax-free cash. While 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 to register, and so protect, their existing tax-free cash entitlement at A-day.

"Individuals who are in a position to increase their contributions to their fund should be aware that details of the transition terms have not been finalised and a great deal will depend on the 'indexation basis' implemented on 'registered assets' at A-day," says Phil Cook.

"We would advise everyone, and particularly those who are close to retirement, to review their circumstances and seek guidance over the best way to maximise their retirement benefits."