UK: Time Is Running Out to Avoid Potential 55% Tax Charge on Income From Pension Investments, Warn Industry Specialists

‘A Day’ Calculator devised by Smith & Williamson’s pensions experts to help you work out if you need protection to avoid 55% tax

Time is running out for people to plan for A Day (6 April 2006) when sweeping changes to pensions will be introduced. It is feared that many thousands of people could end up paying a 55% tax charge on the eventual income from their pension fund.

"However, if urgent action is taken now, it ought to be possible to avoid this swingeing tax charge," said Mike Fosberry, head of pensions and financial planning at Smith & Williamson.

"People should therefore double check their pension arrangements to make sure they will not be adversely affected by the changes this spring. A little time invested now could save people many thousands of pounds in later life."

"We fear there could be thousands people who naively think their pension savings are too small to be adversely affected by the new pensions regime and who therefore won’t bother to take action in time.  Even though initially in tax year 2006/07 a person must have total pension fund values exceeding £1.5million when they start drawing their pension to be taxed at this rate, we suspect there are many people who could unwittingly be at that level or close to it already. If they take action now, they might save themselves a lot of money later on."

"This type of planning is relevant to younger and older people, in medium and higher paid jobs. It has falsely been thought of as something exclusively for the mega-rich – it affects far more than that!"

Those particularly at risk include the following:

• People with final salary benefits – this is because these are quoted as a pension income - as opposed to a total fund value - the latter being the measure used by the government to determine the eventual charge.

• People with sizeable death benefits - people typically forget to include insured death benefits when they tally up their pension investments. These can be very valuable; and, whilst only payable to a spouse in the event of death in service, can push you over the threshold relatively easily.

• Younger people with potentially high earnings in the future. An individual’s pension may be relatively modest now, but by the time they retire in 20 or 30 years time, they may have built up considerable pension investments so the level at which they save needs to be planned.

Pensions from all sources must be taken into account. In addition to the above, this includes AVCs, private pensions, funds built up from previous jobs and the value of any pensions already in payment.

If the value of your pension investments exceeds the new lifetime allowance of £1.5million on 6 April 2006 (A Day) it is possible to protect your investments by taking action now and making one of two elections. One of these ‘enhanced protection’, will protect all pension benefits accrued both before and after 5 April 2006 - provided no further contributions are made after that date.

‘Enhanced protection’ can therefore enable people to avoid the 55% tax charge on income received from their eventual pensions.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Smith & Williamson is an independent professional and financial services group employing over 1,200 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-size corporates. The group operates from offices in London, Belfast, Bristol, Glasgow, Guildford, Salisbury, Southampton, Tunbridge Wells and Worcester.

Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.

Authorised and regulated by the Financial Services Authority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.