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Pensions 'Lifetime Allowance' Frozen

In one of the most radical shake up of the pensions system in a long time, the Government has implemented a 'simplification' of the pensions system, designed to encourage more pensions provision.

The changes first came into force on 6th April 2006, the Government's objective was to treat all pension benefit types in the same way. This applies to all pension types, including the Government run Superannuation schemes.

Those who could be disadvantaged by the new rules will be able to 'ring fence' their benefits by April 2009, the way this needs to be done will require expert advice and guidance.

The new rules are designed to offer a  vast simplification of all regimes into one set of rules, with the ability to fund much more generously  whilst getting full tax relief. This applies to employers Pension Schemes as well as individual Pension arrangements.

The new 'Lifetime Allowance' limit is currently £1,650,000 in pension funds for an individual, above this limit you will be taxed on any benefits in excess of that. For final salary pensions the fund will be calculated by multiplying the pension by a factor and adding any separate tax-free cash entitlement.

This 'lifetime allowance' will increase in stages, which have been set out each year until 2010, when it will be £1,800,000. This limit will be frozen at £1,800,000 from April 2010 until April 2016 as announced in the November 2008 Budget.

Over time this will now lag behind earnings and result in many more funds being taxed in the future. As mentioned above, existing benefits can be 'ring-fenced' by making an election to do so by April 2009.

In short it will mean that every person who has not yet taken their retirement benefits will need careful advice on what to do. Rather than introduce simplification, the new rules present a vast array of complex options and decisions, which will need expert professional advice.

Overall we welcome these changes and expect them to revolutionise the use of private pension provision in the future. The ability to save up to 100% of earnings, up to a £235,000 annual allowance, getting full tax relief in the process, will prompt many high earners to review their financial affairs whilst enabling them to take control of their retirement planning.

These changes may also breathe some much needed life in to the use of self invested pension funds or 'SIPPs' where the assets can be managed across a range of investments. This might be the time to amalgamate your private funds into something much more efficient and focussed. Investments can include commercial property, such as a Nursing Home or Dentist's Surgery, for example. The new rules enable current owners of such assets to move them to their own pension fund, something not possible before these changes. Residential property can be used, but only as a 'syndicated' investment, as a result many collective residential property funds will be looking for investors via their pension funds.

As a result of these radical changes one thing is certain, anyone who has not taken their retirement benefits will need advice on how pensions simplification affects them. Contact your usual MMM adviser or use our web site enquiry service for further assistance.