After this date the complex web of eight current pension regimes will be updated to just one set of tax rules for all types of pension, with an individual Lifetime Allowance (£1.5 million 2006/2007). This lifetime limit will rise by preset amounts for the next 5 years and look likely to be increased beyond this date.
Unlike the current restrictive rules that limit pension investment to a set percentage of salary, contractors will personally be able to place up to 100% of their salary into a pension. In addition the rules regarding funding a pension scheme direct from your limited company appear to allow a massive investment of up to £215k pa irrespective of salary yet in reality it now looks as if these freedoms will be difficult to exploit in practice. For a substantial 'employer' contribution to be allowable for tax relief, the final authorisation will potentially lay with the Local Inspector of taxes which implies that the new rules will trigger unwelcome interest from the taxman, something many contractors may find unpalatable. Clearly this means that, ironically, the current restrictive yet clear-cut percentage based rules may be replaced by more freedom in theory with less certainty in practice that an investment is allowable.
The ‘A’ Day rules will certainly make pensions much simpler for most of investors and there will be a number of key advantages for our clients in the new regime:
Many contractors will have greater flexibility in the size and timing of their contributions.
In many cases, there will be no need to make contribution checks on personal investments.
There will be greater investment flexibility ie collective investments into property (although sadly not directly into residential bricks and mortar as originally planned)
Up to 25% Tax Free Cash will be available on many schemes which do not presently allow tax free elements ie funds from contracting out of the State Second Pension and SERPS
Being able to take smaller pension funds as a one off lump sum as opposed to having to draw a regular income (known as triviality rules)
New and more flexible options at retirement including the freedom to defer purchasing an annuity- indefinitely if required
No need to 'secure' benefits with a rigid annuity by age 75 as at present
There will also be a number of other changes including:-
Earliest retirement age rising from age 50 to age 55 from 2010
Full concurrency i.e. being able to pay into any array of plans you wish (currently many occupational pension holders are unable to enhance benefits with a personal/stakeholder pensions)
The ability to pass pension funds onto future generations using ‘family’ pensions.
It is important to understand that some of the rules are not yet fully finalised and there may well be further changes to the proposed legislation. It does seems fair to state, however, that pension investment will allow far more freedom in future, with greater possibilities for tax savings, enabling contractors to build a better nest egg towards a prosperous retirement.
To discuss your future pension planning along with any existing schemes that you have please fill in our application form and we will be in touch shortly.
Financial advice on these pages is being given by FreelancerMoney, which is a trading name of ContractorFinancials Ltd and is regulated and authorised by the Financial Services Authority.
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