New QROPS rules – Countdown to April 6,2011

New QROPS rules

Expats: How to protect your pension in 2011 and beyond

New QROPS rules basics

1) Lifetime allowance is changing from £1.8m to £1.5m, thus, an additional £300,000 is subject to tax.
2) Any amount above the Lifetime Allowance will be taxed at 50%, rather than the previous 25%. So, the extra £300,000+ will be taxed double the former rate!
3) The test for Lifetime Allowances for Final Salary schemes will change. There will be an increase in the Lifetime Allowance value, attracting additional taxes. Previously a factor of 10 was used, now a factor of 16 is proposed.
4) The annual contribution into a UK pension scheme will be reduced from £255,000 to £50,000.
5) Now that annuities are not compulsory, a flat tax rate of 55% is imposed upon death. So now, your family would lose over half your pension when you pass away.

Guernsey QROPS Update

A tax free cash lump sum payment of 30% is now available for members of Guernsey QROPS schemes who have been out of the UK for more than 5 years, effective from 1st January.

Restriction of Pensions tax relief

excerpts from HMRC web site
There have been a number of recent announcements in connection with the restriction of pensions tax relief. On 14 October 2010 it was announced that the Government intended to restrict pensions tax relief for individuals by reducing the annual allowance (AA) to £50,000 (from £255,000), for the tax year 2011-12 onwards, and the lifetime allowance (LTA) to £1.5m (from £1.8m) for the tax year 2012-13 onwards.

Transitional rules for the AA have effect on and after 14 October 2010. Draft legislation and guidance on the reduced in AA was published alongside the announcement.

On 9 December 2010 the Government announced further details on the reduction in the LTA and set out its proposals for the operation of a new protection regime for individuals who may have already built up pension savings in the expectation that the lifetime allowance would remain at its current level of £1,800,000. Draft legislation and draft guidance on the reduction to the LTA was published alongside this. Revised draft legislation on the AA, which now includes some additions and amendments from the 14 October version, was also published.

For the average Joe, these restrictions won’t have an effect. But, for the highest rate tax payers and those who receive their benefits through tax relief on their pensions (for example bankers), it will have an effect. If you are in the latter category, you need to contact a financial advisor as soon as possible to see what your options are.

Removing the Effective Requirement to Annuitise by Age 75

Legislation will be introduced in Finance Bill 2011 to remove pensions tax rules that currently create an obligation for members of registered pension schemes to secure an income, usually by buying an annuity, by age 75 from April 2011. The legislation also involves changes to annuitisation requirements, and pensions tax treatment and rules applying to income drawdown arrangements.

Pension transfers for people aged 50 to 55

The Government announced in July 2010 its intention to bring forward regulations to remove the unauthorised payments tax charge where an individual aged 50 and over but under 55 transfers their pension in payment to another pension provider.

The announcement also made it clear that the regulations would be backdated to cover transfers made on or after 6 April 2010.
Following informal consultation, the Government has decided that the new legislation should also cover situations where an individual buys a scheme pension or an annuity using funds from an unsecured pension fund.
The Government also wants to clarify that the date on which the normal minimum pension age (NMPA) test should apply is the date of the first payment of pension. Please also see the detail that is included in the last part of this announcement.

Background

The NMPA increased from 50 to 55 from 6 April 2010. Since then, people can normally only start receiving their pension payments without incurring an unauthorised payments tax charge once they have reached age 55. Someone aged 50 and over but under 55 who started drawing their pension before 6 April 2010 can normally continue to draw it without incurring a charge, even when they are not yet 55. However, we have become aware that unintentionally the legislation imposes a charge if such an individual transfers their pension before age 55 to a new provider or changes to a different type of pensions.

New QROPS Rules

We have considered the feedback received from the pension industry and other interested parties during the informal consultation and will publish further draft legislation that includes a Treasury Order.
The regulations will apply to an individual who is aged 50 and over, but under 55, and who has already satisfied the NMPA test of 50 and over prior to 6 April 2010. They will apply where:

sums and assets representing an unsecured pension fund (including an income drawdown) are transferred to another unsecured pension fund with another provider or,

sums and assets underpinning an existing lifetime annuity are transferred to another insurance company to provide a new lifetime annuity or,

sums and assets underpinning an existing short term annuity are transferred to another insurance company to provide a new short term annuity or,

sums and assets underpinning an existing scheme pension are transferred to another registered pension scheme to provide a new scheme pension.

The Treasury Order will apply to an individual who is aged 50 and over, but under 55, who has already satisfied the NMPA test of 50 and over prior to 6 April 2010. It will apply where sums and assets representing an unsecured pension fund are used to provide a scheme pension or a lifetime or short term annuity.

The new legislation will ensure that there will be no unauthorised payments tax charge on the application of these sums and assets, nor on any ensuing payments of pension made before age 55 following the transfer to another provider or the provision of a different type of pension.

Relevant Date for Applying NMPA Test

During the informal consultation, a few industry respondents asked HMRC to clarify the relevant date for applying the NMPA test. We can confirm that this is the date of the first payment of pension in accordance with the pensions tax legislation. In other words, if an individual receives the first payment of their pension after 6 April 2010, the prevailing NMPA of 55 applies. If the payment was received before that date, the previous age of 50 applies.

For new qrops rules updates, please phone or email to qrops@credendaassociates.com

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