Whilst the focus was on VAT, Capital Gains Tax and planned cuts in public expenditure, it also contained significant changes to pension regulation.

Taxation considerations are an integral part of the financial advisory services which we provide. For this reason we consider it essential to offer an in-house tax consultancy and compliance facility to our clients in order that their affairs can be dealt with in a truly holistic way. This guide sets out details of the services provided.

• Group schemes for employees
• Executive schemes for owner managers and senior staff

If designed, implemented and communicated properly, employer sponsored schemes can play a valuable role in rewarding and retaining staff as well as providing a tax efficient way of remunerating directors.

Group Schemes for Employees

Many employers offer membership of a pension scheme to their employees as part of their overall reward package. Indeed, all companies with 5 or more employees must provide them with access to a designated Stakeholder Pension Scheme.

Furthermore, from 2012, employers will be required to automatically enrol staff who are not already members of a ‘qualifying scheme’ into new Personal Accounts to which they (the employer) will be required to contribute up to 3% of ‘qualifying earnings’.

In order to comply with the regulations and extract maximum value from a scheme in terms of employee retention and reward, it is vital to get the scheme design and member communication absolutely right.

Chartermarque act as employee benefit consultants to a number of companies throughout the UK.

We assist with setting and reviewing pensions strategy to meet HR objectives within budgetary constraints – including scheme design and implementation.

Alongside workplace pension arrangements, companies frequently also provide group life assurance and/or group income protection cover for employees.

We can assist in these areas also – in particular by ensuring that the most competitive premium rates are obtained by negotiating terms with those specialist insurers who operate in the ‘employee benefits’ market.

Executive Pensions

Under current pensions legislation an employer can make pension contributions up to the Annual Allowance each year for any of it’s staff.

The contributions will:

• normally be deductible for corporation tax purposes as an expense of the company’s trade (but see next section)
• not be subject to employers’ or employees’ National Insurance
• not be taxed as a benefit in kind for the employee/director.

Given that the Annual Allowance for 2010/11 is £255,000 this is clearly a significant way of extracting remuneration from a business tax efficiently.

Tax Relief

Prior to 6th April 2006 when new rules were introduced, all Executive Pension Plans applied for approval to the Pension Schemes Office of the Inland Revenue. Once approval was granted, all employer contributions automatically qualified for corporation tax relief – the local inspector of taxes had no say in the matter.

That is no longer the case and all employer contributions must now meet the “wholly and exclusively for the purposes of the trade” test otherwise the local inspector can refuse to grant relief.

This could cause problems where for example a substantial contribution is paid on behalf of a director’s spouse who has minimal input in the business. A link to the HM Revenue & Customs’ notes on this issue is provided under “useful links” at the top of this page.

Care also has to be taken following the 2009 Budget announcement that higher rate tax relief is to be withdrawn from high earners (those with annual incomes above £130,000). Although not effective until 2011 interim planning measures have been curtailed by anti-forestalling measures also announced in the Budget – for further details see ‘useful links’ at the top of this page.

*Some of the above links are to external sites. Chartermarque Ltd is not responsible for the content or accuracy of information therein.

Self Invested Personal Pensions were created to meet that demand by allowing investors the options to choose from a wider range of asset classes including:

* Stocks and Shares * Commercial Property * Deposit Accounts

* Fixed Interest Securities * Futures and Options

* Unit Trusts, Investment Trusts & OEICs

* Traded Second Hand Endowments

SIPP’s have the same tax benefits and are subject to the same regulations as conventional personal pension plans – the only real difference is that they separate the administration function, which is handled by the SIPP provider, from the investment function, which the investor can either undertake personally or perhaps delegate to his stockbroker.

Choosing a SIPP Provider

Several factors should be taken into account when choosing which SIPP provider to use:

Cost - charging structures vary between providers although most have an establishment charge of around £450+VAT plus an annual administration fee of around £300+VAT. Thereafter they may have fixed charges for each investment transaction and for holding property. Give some thought to the way in which you intend to operate your SIPP and identify the most cost effective plan for you.

Services - Some providers offer more than one SIPP product. This enables them to cater for investors who want on-line facilities so they can operate the plan themselves as well as those who wish to delegate investment decisions to a discretionary fund manager. Again, make sure you choose the model which best meets your objectives.

Specialisms - If you want to use your SIPP to acquire commercial property or unlisted shares, make sure you choose a SIPP provider with specialist knowledge and experience of dealing in these complex areas. Most SIPP providers say that they can handle commercial property transactions but In reality some of them have very little experience whereas others administer large property portfolios and are much more adept. Similarly if you want to contribute property or shares to your SIPP instead of cash, it’s important to use a provider that understands the issues and offers the facility – not all do.

The complex nature of SIPPs means that they are not suitable for all investors. Often, the benefits of ‘self investment’ are only advantageous to those with very large funds and / or an above average level of sophistication when it comes to investment decisions. Furthermore, the additional charges for arranging and dealing within a SIPP might erode smaller funds quickly.

*Some of the above links are to external sites. Chartermarque Ltd is not responsible for the content or accuracy of information therein.

The new regime introduced a single set of tax rules for all types of pension and imposed an individual Lifetime Allowance (£1.8 million in tax year 2010/2011). . Everyone is now able to fund up to this new limit – assuming of course that they can afford to do so.

Exceeding the Lifetime Allowance will however trigger some unwelcome tax charges as explained below.

When benefits are withdrawn from a registered pension arrangement at retirement or death, the value of those benefits is tested against the Lifetime Allowance and any excess is subjected to a ‘recovery tax’ charge.

The rate of tax depends upon the way in which the excess benefits are taken and will be 25% if taken as pension or 55% if taken as a lump sum. Despite the apparent difference, the decision is actually tax-neutral. This is because after suffering the 25% recovery tax the residual pension would then be subject to income tax at 40%. Apply the two taxes in sequence and they equate to a combined rate of 55%.

In valuing benefits for the purposes of testing them against the Lifetime Allowance, money purchase funds are simply taken at face value whilst defined benefit/final salary pensions are capitalised using a factor of 20:1. Pensions already in payment also count towards the Lifetime Allowance and are valued using a factor of 25:1 (the higher factor is based on the supposition that in addition to the pension, the individual probably also took a tax free lump sum at retirement).

Transitional Protection

Fortunately the Government realised that the imposition of the Lifetime Allowance could have a retrospective effect on anyone who had already built up substantial pension benefits before ‘A-Day’.

To prevent such people being unfairly subjected to the new tax charge, the legislation allowed them to register their existing benefits for two types of transitional protection both of which are described below.  Unfortunately, the option to register for protection ceased on 5th April 2009 but for those who exceed the Lifetime Allowance without protection, other planning measures are available which might mitigate exposure to the lifetime allowance tax charge.

Primary Protection

Primary Protection was only available to those who had existing pension rights worth more than £1.5 million as at 6th April 2006. By registering these benefits with HM Revenue & Customs, only additional pension rights built up after ‘A-Day’ will be deemed to be excessive and subjected to the recovery tax charge.

Therefore, anyone with Primary Protection is subject to a ‘Personal Lifetime Allowance’ instead of the ‘Standard Lifetime Allowance’.

For example someone with pension benefits worth £3 million at ‘A-Day’ who claims Primary Protection will have a Personal Lifetime Allowance equal to twice the Standard Lifetime Allowance.

Enhanced Protection

Anyone was able register for Enhanced Protection regardless of the value of their benefits at ‘A-Day’. This approach involves undertaking to accrue no further ‘relevant benefits’ after ‘A-Day’ in which case existing pension rights will never be tested against the Lifetime Allowance nor be subject to the recovery tax charge.

Payment of any contribution to a money purchase pension arrangement after 6th April 2006 will immediately invalidate any claim for Enhanced Protection.

However, continuing to participate in, or contribute to, a defined benefit/final salary pension scheme does not necesarilly invalidate the claim. That is because, in these types of scheme, establishing whether ‘relevant benefit accrual’ has occurred is an output test measured not by contributions paid into the scheme but by the growth in the value of the benefits paid out at retirement relative to their value at ‘A-Day’.

* The above links are  to external sites. Chartermarque Ltd is not responsible for the content or accuracy of information therein.

The new regime introduced a single set of tax rules for all types of pension and imposed an Annual Allowance . The limit for 2010/11 is £255,000.

Although anyone who can afford to do so can contribute up to the Annual Allowance each year, income tax relief can only be claimed on payments up to 100% of taxable earned income. Therefore you would have to earn at least £255,000 in 2010/11 to be able to fully utilise the Annual Allowance tax efficiently.

This earnings rule does not however apply to employer contributions paid on your behalf – so if you own your own business, it can pay contributions for you up to the Annual Allowance regardless of your earnings and still claim corporation tax relief. If however it were to contribute more than the Annual Allowance then the excess would be subject to a 40% ‘benefit in kind’ income tax charge.

It should be noted that in his 2009 Budget Speech the then Chancellor of the Exchequer announced that from 2011 those individuals with annual income of £130,000 or more will no longer be entitled to higher rate tax relief.

Furthermore, to prevent affected individuals from maximising their contributions prior to 2011, he also announced anti-forestalling measures which effectively limit higher rate relief on new contributions to £20,000. Click on the link above right for more details.       

**** STOP PRESS – JUNE 2010 – NEW COALITION GOVT. ANNOUNCES RETHINK OF PENSION TAX RELIEF RESTRICTIONS – CONSULTATION PERIOD ENDS 27 AUGUST 2010 ****

Pension Input Periods

Whilst each tax year has its own Annual Allowance, the test as to whether the allowance has been exceeded is not based on pension contributions during that tax year but over the course of what is known as a Pension Input Period.

These Pension Input Periods can vary in length – for example, once a contribution is paid, the investor can immediately elect to end the Pension Input Period to which it relates. If no election is made, it is assumed to end one year after payment of the contribution.

Closing one input period automatically opens the next. However, each period must end in a different tax year and it is the year in which this end point falls which determines which Annual Allowance figure applies.

*Some of the above links are to external sites. Chartermarque Ltd is not responsible for the content or accuracy of information therein.

As well as a tax free lump sum, the income options might include

• Annuity Purchase
• Unsecured Pension
• Alternatively Secured Pension
• ‘Scheme Pension’
• Phased Retirement
• Temporary Annuity

Having spent your working life saving for retirement, making the right choices when the time comes is clearly crucial; particularly when the sums involved are substantial.

For an overview of the options you can download our 18 page guide “Your Options Explained”.

Annuity Purchase.

Where you have built up funds in a personal pension plan and wish to convert them into a fixed and secure lifetime income then you can achieve this by purchasing an annuity.

You have to decide what features you want to include at the outset such as frequency of income payments, inclusion of a spouse’s pension on death, automatic increases etc. Once the annuity is purchased the basis on which it was set up cannot be altered.

You need not purchase your annuity from the same pension provider to whom you paid your contributions but can instead exercise an ‘open market option’ whereby the accumulated fund can be used to secure an annuity with another company offering better rates. A link to the Finacial Services Authority comparitive annuity tables is given below.

Annuity rates are generally driven by interest rates and mortality considerations so the older you are the better the rate should be. Furthermore, if you are a smoker or have a poor health record you could obtain more favourable terms from specialist annuity providers.

Finally, be aware that some older pension policies include valuable Guaranteed Annuity Rates which are well above those currently available on the open market.

**** STOP PRESS – JUNE 2010 – NEW COALITION GOVT. ANNOUNCES RETHINK OF INCOME DRAWDOWN AGES AND LIMITS - CONSULTATION PERIOD ENDS SEPTEMBER 2010 ****

Unsecured Pension.

Unsecured Pension is a facility whereby those who do not wish to commit to annuity purchase can keep their pension fund intact and draw an income from it.

Where this strategy is pursued, the level of income taken must fall within limits that are set by the Government Actuary’s Department (GAD). It is possible to take no income, as a minimum level, and up to 120% of the amount that could have been secured by a single life level annuity, as the maximum. A link to the Government Actuary’s Department tables is given above.

As well as offering flexibility of income, a perceived advantage of Unsecured Pension is the fact that on death, the residual fund can be returned less a special tax charge of 35%.

Unsecured pension can continue until age 77. Upon reaching age 77 and still not wishing to purchase an annuity it is necessary to switch to ‘Alternatively Secured Pension’,

Alternatively Secured Pension

Alternatively Secured Pension is a variant of the income withdrawal facility described above under Unsecured Pension. It allows income withdrawals to continue to be made after age 77 (when Unsecured Pension must cease).

The income limits are however more restrictive – the income cannot exceed 90% of the Government Actuary’s Department (GAD) rate for a male or female aged 77. There is a minimum limit of 55% of GAD. The plan is reviewed annually with the income limit being amended as appropriate at that point (but the income rate is still based on a 77 year old plan holder regardless of actual age).

However, the most significant difference between Unsecured and Alternatively Secured Pension is that on death the former can return the residual capital to beneficiaries less a tax charge of 35% whereas after age 77 any return of capital is treated as an unauthorised payment and subject to an array of punitive charges including Inheritance Tax, the combined effect of which can result in an 82% tax charge.