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Important Pension Changes – what family lawyers need to know

Clive Weir, a director with Albert Goodman Chartered Financial Planners, summarises the changes to pension provision made in the Chancellor’s Autumn Statement.

Lifetime Allowance
The Lifetime Allowance was introduced in April 2006 and initially set at £1.5 million. It increased over the following four years to £1.8 million. However, from 6th April 2012 it was reduced back to £1.5 million.

The Chancellor has now announced that this will be reduced further to £1.25 million with effect from the 2014/15 tax year. This may still seem quite high but an individual who has served 40 years in a 1/60ths final salary pension scheme whose salary is in excess of £93,750 will be affected by this change. Equally somebody in their early 50's with a total pension pot today of £700,000+ could see themselves exceed this limit at age 65.

Any clients whose benefits are likely to exceed this new limit may need to seek transitional protection.

Action Point for Practitioners
Family lawyers will need to consider whether any clients will have a possible tax charge as a result of the benefits they have accrued, or as a result of a pension sharing order. Particularly care needs to be taken on clients who may breach the Lifetime Allowance by the time they reach retirement age.

Transitional Protection
In the past individuals have been able to apply for protection against the changes in the Lifetime Allowance in the form of primary, enhanced or fixed protection. Now an additional protection – Fixed 2014 – is to be introduced from 6th April 2014 providing individuals with a Lifetime Allowance of £1.5 million from 6th April 2014 but no further provision can be made after this date. Individuals who have applied for the previous forms of protection will be unaffected.

The Chancellor has also announced plans to consult on a new 'personalised protection' regime but this will only be available for those individuals whose pension rights exceed £1.25 million on 6th April 2014. This will provide these individuals with an individual Lifetime Allowance of up to £1.5 million but will enable them to continue to save towards this limit.

As a reminder any benefits in excess of the Lifetime Allowance will be taxed at 55%.  

Action Point for Practitioners
Whilst any financial adviser appointed by the client to assist with the implementation of a pension sharing order should have an on-going responsibility to establish whether a client should apply for transitional protection there may be some clients (for example recipients of an internal / shadow membership benefit) who may not have appointed a financial adviser. I would suggest that the family lawyer reviews their Terms of Engagement to ensure whether they have an on-going duty of care or not.

Annual Allowance
Again you may recall that the Annual Allowance was introduced in April 2006 and was initially set at £210,000 and it increased over the following 4 years to £255,000. But from 6th April 2012 it was dramatically reduced to £50,000. With effect from 6 April 2014 this will reduce further to £40,000.
This could result in many more clients paying an Annual Allowance charge on excess benefits at their marginal rate of income tax. This could be particularly true of middle management in the public or private sector who are members of defined benefit schemes receiving a promotion and subsequent pay increase.

We do still have the ability to carry forward unused relief from the previous three tax years and receive tax relief - this is becoming increasingly popular to provide the funds to settle a pension sharing order.

At present a maximum of £250,000 can be funded using a carry back exercise but this will reduce to £200,000 by the 2017/18 tax year.

Action Point for Practitioners
As the 6th April 2014 approaches consideration will need to be given as to whether the pension member may have a tax liability within their self-assessment for an Annual Allowance Charge, particularly with high earners within a defined benefit scheme, and if so account for the tax liability in the appropriate disclosure documents.

If funding exercises are to be undertaken, early assistance from a financial adviser to establish eligibility is strongly recommended.

Pension Drawdown Limits
Up until 6 April 2011 individuals who took an income directly from their pension fund, rather than purchase an annuity, were able to take an income of up to 120% of the limit  set by the Government Actuaries Department (GAD).

Clients who have reached their income review since 6th April 2011 have been hit by a triple whammy: 

The Chancellor has announced that the 120% maximum is to be reintroduced. At the moment we do not know when this will be introduced as it requires changes in legislation. However this will, when introduced, enable clients to draw higher levels of income from their pension arrangements. Another interesting factor to remember is that HMRC equalised the income factors at the more favourable male rate for gender equality purposes.

Action Point for Practitioners
These changes when introduced will allow the pension member to take a higher level of income than at present. Clients who have reached their income reviews in recent months will probably have seen a significant reduction in the income available to them. Some product providers however may not allow 'mid term' changes in income so clients who wish to take advantage of the change may either have to wait until their next income review date or switch providers.

Clive Weir
Director, Albert Goodman Chartered Financial Planners