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07 December 2012

Autumn Statement 2012: a summary of key points affecting pensions and taxes and allowances

Chancellor George Osborne has delivered his 2012 Autumn Statement to a mixed reaction. In his statement he unveiled a raft of measures which included an increase in the higher rate threshold, the reduction in the lifetime pension relief allowance, and changes to the personal tax allowance. He confirmed that it would take longer to clear the country's debts than he previously thought, which would signify a longer- than-planned number of spending cuts.

Commenting on the statement, Iain Herbertson, Managing Director said; "The real surprise is the reduction in the lifetime allowance, which is a blow to the pension savings culture. This will have a significant impact on individuals with substantial pension funds, or those looking to build a substantial pension fund in retirement".

John Glover, Business Development Manager, added; "It was not all bad news as the basis rate increase to 120% GAD, will offer some relief for clients in drawdown and allow them to increase the level of pension they can draw".

City Trustees at-a-glance summary of key points affecting pensions and taxes

What about pensions?

  • The annual allowance for pension scheme contributions has been reduced from £50,000 to £40,000; this is to take effect from 2014/2015 onwards
  • The lifetime allowance is to be reduced from £1.5 million to £1.25 million with effect from 2014/2015
  • The basis rate for pension income will be increased from 100% of GAD to 120%
  • Clients with pension pots in excess of, or which are likely to exceed £1.25 million, can apply for protection

What has happened to taxes?

  • 2013/2014 personal tax allowance increased to £9,440
  • Higher rate tax threshold of 40% increased to £32,011 in 2013/2014, with a further 1% rise in 2014/2015
  • Additional rate tax reduced to 45% for income over £150,000 from 2013/2014
  • The corporation tax relief will be cut by 1%, bringing the rate down to 21% with effect from 2014/2015
  • The IHT nil-rate band was frozen in 2010 at its current level of £325,000 until April 2015. For 2015/2016 the band will be increased by 1% rounded up to £329,000
  • Increased measures for tackling tax avoidance and evasion have been introduced from 5 December 2012, including foreign bank levies, tax mismatch scheme, property return swaps, manufactured payments and payments of patent royalties

City Trustees commentary:

Annual allowance - Whilst the annual allowance reduction from £50,000 to £40,000 does not take effect until 2014/15, this will see a significant reduction in the amount that can be contributed to pension schemes.

When you consider that rules were changed in 2006 to allow contributions of over £200,000 per annum, the contribution maximum has been reduced by in excess of 80%, which significantly reduces scope for individuals in later life to make up previous shortfalls in pension funding. This will also reduce the amount of tax relief individuals can receive back from any pension contribution, and reduce the ability to mitigate some personal tax through pension contributions.

Lifetime allowance - A pension fund of £1.25 million would provide a 60-year old male with a tax-free cash lump sum of £312,500 and a residual pension in the region of £42,000 per annum. This is a significant fall in the level of income that can be paid, as it was supposed to be linked to the maximum two thirds pension an individual could draw from a final salary scheme based on the earnings cap back in 2006.

The amendments will also further complicate the pension structure, by creating another tier of protection on top of primary protection, enhanced protection, and fixed protection, and go against the Government's plans in 2006 by introducing Pension Simplification to simplify and make pensions easier to understand.

The reduction in the lifetime allowance will also potentially have significant implications for individuals who stray above the £1.25 million allowance, with a potential tax charge of 55% on excess funds.

Basis rate increased to 120% of GAD - The removal of the 120% of GAD calculation, coupled with a significant fall in the gilt index yield, has created the 'perfect storm' for clients in drawdown over the last two years, as even with fund values holding up well, individuals have seen significant falls in the level of pension they can draw.

The reinstatement of the calculation based on 120% of GAD will offer some relief for clients in drawdown.

The Autumn Statement can be viewed in full on the HMRC website. To discuss any of the measures included in the statement and how they may affect your clients, please contact info@citytrustees.co.uk.

 

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