Boosting your pension

Act fast before the end of the tax year

Here are some useful hints that may improve your pension prospects.

Some employers may allow selected staff aged 50 and over (rising to age 55 and over from 6 April 2010) to claim an income from their pension while they work full time. This option has been made possible by changes to pension rules in 2006, known at the time as A-Day. For members of defined benefit schemes, the size of the annual pension payment is cut by a certain percentage for each year the worker claims their pension early. However, members continue to accrue further pension rights under the plan, which is typically based on career-average pay, even when claiming a pension and salary in tandem.

You can take up to 25 per cent of your pension as an authorised lump sum payment, which will be tax-free as long as it does not exceed 25 per cent of your available standard lifetime allowance.

It is also possible to take up to 25 per cent as a tax-free lump sum and then vary the income taken from the pension by leaving the fund invested and going into an unsecured pension (formerly income drawdown). This can be done with a personal pension, such as a Self-Invested Personal Pension (SIPP), or an occupational scheme, although few of these allow it. It is possible to take between nil and 120 per cent of rates set by the Government Actuary’s Department (GAD). This is reviewed every five years. Income levels can be changed within these boundaries or an annuity bought at any stage.

Funds can be passed on to beneficiaries when you die, subject to a 35 per cent tax charge before the age of 75. If paid as a lump sum, residual funds paid as a dependant’s pension would not be subject to a 35 per cent tax charge.

GAD rates are tied to gilt yields, which are near all-time lows due to the Bank of England’s programme of buying up gilts (yields fall as prices rise). However, with a ‘scheme pension’, available via a SIPP, it is possible to take more money out of a pension fund. Rates are calculated by an actuary rather than GAD, taking into account assumptions of how long you are likely to live, i.e. the poorer your health, the higher the rate.

If you have a Small Self-Administered Scheme (SSAS), your business (sole trader, partnership, limited company or limited liability partnership) can borrow money from your pension fund at very competitive rates, a minimum of 1 per cent over the rates offered by the six main clearing banks. This means your business could potentially borrow money which can be fixed for up to five years. In this way, directors and business owners can access vital funding they might not be able to get from their bank. Please note there are limitations on what this lending can be used for.

Although the government performed a U-turn on allowing savers to put single residential properties, such as their second homes, into their pension funds in 2006, you can tap into the residential property market if you have a SIPP or SSAS through a ‘genuinely diversified commercial vehicle’.

You can also use existing investments to make a pension contribution by selling them and buying them back in your SIPP, in what is known as ‘bed and SIPP’. There is also the option of making ‘in-specie’ contributions of assets that are currently owned by the individual (or an employer) into the SIPP.
From the start of the new tax year on 6 April 2010, the withdrawal of the personal allowance by £1 for each £2 earned over £100,000 means that those earning between this amount and £112,950 will effectively get 60 per cent tax relief on pension contributions. That is because they will not only get 40 per cent tax relief on contributions, but also some or all of their personal allowance back depending on how much they contribute.

If you die before taking any benefits from your personal or occupational pension scheme, the entire fund will pass tax-free to your chosen beneficiaries. These will, however, be added to your beneficiaries’ estates for Inheritance Tax purposes. Any lump sum paid on death before crystallisation (an uncrystallised funds lump sum death benefit if it is a money purchase scheme or a defined benefits lump sum if it is a defined benefits scheme) will be tax-free as long as it is paid within two years of death and it is within the deceased’s available lifetime allowance.

While the payment of a dependant’s pension would not be a Benefit Crystallisation Event, it would be subject to Income Tax in the hands of the recipient (especially given that most defined benefits schemes – and contracted out rights whether held in a defined benefits or defined contributions scheme – must provide a pension if there is a spouse).

Inheritance Tax is levied at 40 per cent, so a £200,000 pension fund could potentially incur tax charges of £80,000 if this is over and above other assets worth over the current nil-rate band of £325,000. You could plan for this by setting up a ‘bypass trust’. Your beneficiaries, usually a spouse or partner, would be a trustee and have full access to income and capital from the trust as required.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.