d6ee21dc 7060 4ceb 866d 7a3b11e9807d 800x380 - Added protection for pension savers

Added protection for pension savers

The new Pensions Scheme Act received Royal Assent on 11 February 2021. The Act covers a number of important pensions-related issues and has faced a long journey through parliament, starting in October 2019, that included delays due to both Brexit and the coronavirus pandemic.

The Act has been described by government as ‘the biggest shake-up of UK pensions for decades. The Act will provide for enhanced powers for the Pensions Regulator, including the power to impose civil penalties of up to £1 million and three new criminal offences.

One of new criminal offences, that could result in up to seven years in prison, will target bosses who run pension schemes into the ground, or plunder pots to line their own pockets. This is expected to strengthen the regulators’ powers to take efficient and timely actions to protect members’ hard-earned savings.

The legislation also introduces a new pensions dashboard creating one single platform to access and review pension pots, and the creation of new style collective defined contribution (CDC) schemes. CDCs have the potential to increase returns for millions, whilst being more sustainable for both workers and employers.

The Act also aims to ensure that pensions help with climate change governance by moving towards a net zero future through climate risk reporting.

The measures in the Act will come into force at different times as secondary legislation is introduced.

Source: Department for Work & Pensions Wed, 17 Feb 2021 00:00:00 +0100
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Tax on an inherited private pension

Private pensions can be an efficient way to pass on wealth, but it is important to consider what, if any, tax will be payable on an inherited private pension. The person who died will usually have nominated the recipient by telling their pension provider that they should inherit any monies left in their pension pot. If the nominated person can’t be found or has since died, the pension provider may make payments to someone else instead.

In general, if you inherit a private pension and the owner of the pension fund died before the age of 75, the benefits left in a private pension can be paid as a lump sum or as drawdown income with no tax to pay. If the deceased passed away after the age of 75 the pension will be taxed at your marginal Income Tax rate, so 20% if you are a basic rate taxpayer or 40% if you are in the higher tax bracket and 45% if you pay tax at the top rate. The rates may differ if you are a Scottish taxpayer.

There are restrictions on pensions from a defined benefit pot (usually workplace pensions) whereby the pension can usually only be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. This rule can sometimes be changed if the pension fund allows, but the inheritance will be taxed at up to 55% as an unauthorised payment.

The rules on inheriting a pension are complex and depend on what type it is and how old the holder was when they died. For example, you may also have to pay tax if the pension pot owner was under 75 but had pension savings worth more than £1,073,100 (the lifetime allowance) when they died. There are also important time limits that must be followed.

Source: HM Revenue & Customs Wed, 13 Jan 2021 00:00:00 +0100
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The private pensions’ annual allowance

The annual allowance for tax relief on pensions has been fixed at £40,000 since 6 April 2014. The annual allowance is further reduced for high earners. Since 6 April 2020, the tapered annual allowance increased from £150,000 to £240,000. 

This means that anyone with income below £240,000 is no longer affected by the tapered annual allowance rules. Those earning over £240,000 will begin to see their £40,000 annual allowance tapered. For every complete £2 income exceeds £240,000 the annual allowance is reduced by £1. The annual allowance can also be lower if the taxpayer flexibly accessed their pension pot.

There is a three year carry forward rule that allows taxpayers to carry forward unused annual allowance from the last three tax years if they have made pension savings in those years. The calculation of the exact amount of unused annual allowance that can be carried forward can be complicated especially if you are subject to the tapered annual allowance.

There is also a pensions lifetime allowance that needs to be considered. The lifetime allowance limit is currently £1,073,100.

Source: HM Revenue & Customs Sun, 13 Sep 2020 00:00:00 +0100
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The new State Pension

The new State Pension is payable to those that reach the State Pension age on or after 6 April 2016. The full new State Pension is currently £159.55 per week and is payable to eligible women born on or after 6 April 1953 and eligible men born on or after 6 April 1951. Retirees that reached the State Pension age before 6 April 2016 will continue to receive the State Pension (not the New State Pension) under the old rules.

Claimants require 35 qualifying years of National Insurance Contributions in order to receive the full new State Pension. Individuals that have fewer than 35 qualifying years when they reach State Pension age will get a pro-rata amount of the new State Pension, subject to a minimum requirement of 10 qualifying years.

A persons national insurance record before 6 April 2016 is used to calculate their ‘starting amount’. This is part of the new State Pension. The starting pension amount could include a deduction for any applicants that had previously been contracted out of the Additional State Pension.

Planning note:

The contribution rules changed from 6 April 2016, and there is no longer an option to be contracted out. However, readers who were contracted out in the past, paid National Insurance at a lower rate and this can impact upon their entitlement to the full amount of new State Pension.

It is possible to apply for a pensions forecast if you are unsure of your future entitlements to the State Pension (new or old version). Please call if you would like help organising this.