The Government say its one of the “biggest” shake-ups in tax rules for pensions in 20 years
Pension holders are being encouraged to check their circumstances ahead of a big rule change set by HMRC.
One of the biggest shake-ups in tax rules for pensions in 20 years is about to happen next month, impacting everyone who draws money from their pension. Starting from April 6, the threshold at which tax starts to be charged on pension savings is being removed.
The Finance Bill approved in February gets rid of the lifetime allowance. This used to make the first £1,073,100 in pension savings completely tax-free, with anything over this limit hit with a hefty 55% tax rate when withdrawn.
Nigel Huddleston, the Treasury minister, explained that these changes would “encourage people to stay in work and utilise their expertise for longer”. It’s thought that removing the lifetime allowance will keep an extra 15,000 workers every year, according to predictions made by the Office for Budget Responsibility (OBR).
Addressing the House of Commons, the Treasury Minister said: “The Bill will complete the abolition of the lifetime allowance, amending pension tax rules so that employees with valuable, hard-earned expertise are no longer encouraged to reduce their hours or retire early.”, reports the Manchester Evening News.
Last year, Chancellor Jeremy Hunt announced this move in the spring budget. The main goal is to stop doctors from retiring early, preventing possible staff shortages in the NHS.
However, starting from next week, two new taxes will be introduced on lump sum withdrawals instead of the lifetime allowance and this might surprise some retirees.
The new tax rules, known as the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA), will let people take out up to a quarter of the current lifetime allowance, £268,275, from their pension pot before they have to pay tax on it. But this could mean more pensioners end up paying tax, depending on their scheme.
If you’re getting a defined benefit pension, which is based on your final salary, or a defined contribution scheme, you might only get your payments in lump sums. This means you could reach this tax-free limit quicker than people on other pension plans.
The LSDBA lets you transfer up to £1,073,100 of your leftover pension allowance to someone else when you die, without them having to pay tax on it. But this amount will be less if you’ve already taken out lump sums during your life, and it could even affect how much tax the person who gets your pension has to pay – unless it’s paid as an annuity or drawdown.
If you’ve been taking money from your pension and have already gone over the current lifetime allowance, you’ll keep paying tax as usual and won’t get any benefits from the new lump sum allowances. Any money you make over the LSA limit will be taxed as income.
What should I do next?
If you’re worried about changes to your pension and how much tax-free cash you can claim, experts recommend talking to a financial adviser. This is because the taxman – HMRC – is introducing lots of new rules including new lump sum allowances.
The chartered Financial Advice and Services organisation has given some useful tips for those concerned.
They said: “Some pension holders could be entitled to additional tax-free cash, in particular if they have taken benefits from a Defined Benefit pension and did not draw the maximum available tax-free cash. Those with specific pension protection may also need to check to see whether the new rules carry any implications for existing defined contribution pension arrangements.”
“In addition, the new Lump Sum and Death Benefit Allowance could lead to more beneficiaries paying tax when receiving pension benefits following the death of the pension holder; however, this can normally be avoided by ensuring that Beneficiary Flexi-Access Drawdown is an option under the pension contract.”
“It is important to note that not all pension arrangements offer Beneficiary Flexi-Access Drawdown and it is therefore worth checking that this is an option under an existing pension plan. If it is not an option, it may be worth considering whether the existing pension arrangement is appropriate, and if any action is needed to move the pension to an alternative plan.”
“It has always been important to complete an Expression of Wish declaration on a Defined Contribution pension, to guide the pension trustees on who you would like your pension benefits paid to. The new rules only strengthens the need to ensure a valid nomination is in place so that the option to draw benefits under Beneficiary Flexi-Access Drawdown is available.”
News Related-
Recall Just Announced For Popular Cookies Featured In Holiday Gift Baskets
-
Eagles rally past Bills in overtime as Chiefs win
-
Reality bites the green energy agenda
-
Sandigan orders Marcos Sr. pal to pay workers
-
DSWD: Shear line, LPA affect 1.2 million people; over 18,000 families evacuated
-
The mayor of Paris is making a loud exit from X, calling the platform a 'gigantic global sewer'
-
Rain showers, thunderstorms over Luzon, including Metro Manila — Pagasa
-
'Naruto' live-action film adaptation is in the works
-
NASA Highlights Stingray Nebula
-
Manila's Lagusnilad underpass opens
-
China probes debt-ridden financial giant
-
China's VUCA situation
-
Unraveling the mystery that is diabetes
-
Bangladesh's nuke plant is not going to steal PH investments