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Pensions made simple
Page 42
Page 43
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Wen it comes to pensions the government has woken up and smelled the coffee: what was needed was less regulation. Has it worked? Peter Willis repor.s.
he biggest group of workers in the road transport industry is the self-employed, be they owner-drivers or small operators. Historically, their pensions schemes were made fiendishly complicated by numerous sets of rules and restrictions on allowances, but from 6 April this has all changed.
New rules have simplified the tax regime.They set out how much you can save, what you can invest it in and how you can use it come retirement. They affect everybody, but are of particular interest to the self-employed and small business owners.
Before April the tax-free allowances were linked to age and income, starting at a maximum of 17.5% of income per year up to age 35. and rising to 40% above 61. Now, everybody has a single Lifetime Allowance fora tax-free pension pot, to which they can contribute pretty much as and when they like, or can afford. This is currently set at a maximum of £1.5rn but will rise in stages to £1.8m by 2010-11.
Anothernewallowance,the Annual Allowance, governs annual con tributions.For any individual the limit is 100% of earnings, or up to £3,600 if annual earnings are lower than that, in keeping with the recently introduced Stakeholder rules, The contribution cap is currently £225,000 rising to £255,000 in 2010/11.
What about employees? Except for the very highly paid, such as directors, there will be little difference. But if you exceed the earnings cap of £105,600 you'll need to take advice on remaining within the Lifetime Allowance.
Your fund's value is calculated at the point of 'crystallisation the moment it's turned into a pension. You need worry only if you're likely to approach the LI .5m limit, allowing for inflationary increases between now and your retirement. For defined-benefit pensions, the Lifetime Allowance will be 20 times the actual annual pension, rega rdless of the cost of providing it.
If you overshoot the allowance the excess will be subject to tax at recovery charge rate (55%), which negates the tax relief. Existing funds that are or might become bigger than the £1.5m cap can be registered to enjoy tax relief, and can continue to grow in proportion, but you must act within three yearsbefore 6 April 2009.
The minimum retirement age is now 55 (up from 50) but new rules make it easier to continue to work while drawing your pension even working for the employer who's paying it and you can still get a 25% lump sum on retirement.
Having to use your pension fund to buy an annuity, which stops when you, or a spouse, dies, and leaves nothing for your heirs was very unpopular. Since 6 April you can opt instead for an Alternatively Secured Pension. This will ensure an income in your lifetime while allowing you to pass on any unused funds to your heirs.
There were plans to allow investment in a holiday home, or cases of wine, but this was a loophole that the Chancellor closed last year. The original plan was to ease restrictions on the type of investments available to allschemes.This included SIPPs (Self-Invested Personal Pensions) and SSASs (Small Self-Administered Schemes), where fundholders could directly influence the fund's investments. Many were putting second homes and fine wines into the pensions tax shelter, creating a have-your-cakeand-eat-it type ofeulture,which had not been the government's intention. Hence the abrupt about-turn in December 2005.
Smuggling a personal asset into your pension portfolio will be countered with heavy tax penalties on the disallowed assets, plus penalties for the scheme administrator and possible deregulation — and hence loss of tax relief — of the entire scheme. In other words, don't even think about it.
Other liberalisations include investing in unquoted companies, including your own, and investment transactions with scheme members or their relatives, provided they are on commercial terms. Loans to scheme members will not be permitted, but may be made to unconnected firms or individuals.
You can still borrow to invest through your scheme, but the borrowing rules have changed. Previously a scheme could borrow up to 75% of the purchase price for commercial property. Under the new rules schemes may borrow for any investment purpose. hut the limit is 50% of the net value of the fund. Investments must be suitable for the purposes of the scheme:this is up to the trustee and the administrator to decide.
Pension regulations involving tax and time will never he truly simple. But the new rules make it easier to control your destiny, and for the owners of small businesses to integrate their pension provisions into their general financial arrangements. As ever, the advice of an expert will be essential. •