PENSIONS IN THE NEWS
As you may be aware, the Government has introduced legislation
effective from 6 April 2006 that has had a major effect on pensions
and how we all fund our retirement. The aim of these reforms is
to make pensions more flexible and provide more opportunities to
save, whether through company pension schemes or through personal
pension plans.
The main changes are as follows:
Lifetime Allowance
Although it will only affect a few people, there will be a Lifetime
Allowance on pension benefits that can be built up. The Lifetime
Allowance will be £1.5 million initially and will increase
each year, reaching £1.8 million by April 2010. The total
value of an individual’s pension benefits cannot exceed the
Lifetime Allowance without attracting a tax charge on the excess.
Annual Allowance
In addition there will be an Annual Allowance that will control
the build up of final salary pension benefits and the level of contributions
to money purchase schemes. The Annual Allowance will be £215,000
initially, so again this will only affect a small number. This will
rise to £255,000 by April 2010, although no one can pay in
more than their annual earnings or £3,600 if greater. All
employees will have the opportunity of paying into a personal pension
scheme even if they are currently in an employer’s pension
scheme.
Change to early retirement age
The age from which early retirement benefits may be taken is to
rise from 50 to 55 by April 2010. However, schemes can decide how
and when they introduce the new minimum retirement age. In order
to allow Kingfisher members the maximum flexibility when planning
their retirement, we will not introduce the new minimum retirement
age until April 2010.
Tax-Free Cash
Before the legislation was introduced, Final Salary members of
the Kingfisher Pension Scheme could take a tax-free cash sum on
retirement of roughly 2.25 times their annual pension. Money Purchase
members could generally take up to 25% of their accrued pension
fund as tax-free cash on retirement.
These rules stated that no part of an AVC fund (started after 7th
April 1987), could be taken as cash and could only be used to provide
a pension. From April 2006, schemes are able to provide a tax-free
cash sum, which amounts to 25% of the capital value of a member’s
pension fund and this can now include AVC funds. This change will
allow people more flexibility in how they take their pension and
is very welcome.
We have changed the Scheme rules to allow members who retire from
6 April 2006 to take the new maximum tax-free cash sum. This applies
to both Final Salary and Money Purchase members, and includes the
use of AVC funds when calculating the amount of tax-free cash available.
Death Benefits:
Final Salary members
For members of the Final Salary Scheme, the rules on death-in-service
benefits will be unchanged after 6 April. So if you die before normal
retirement age, whilst a contributing member, the scheme will pay
the following amounts: a lump sum of four times your Salary or four
times your Final Pensionable Salary (if greater), together with
all your contributions with interest added. Half your pension will
be paid to your dependants plus allowances (pensions) for any children
you have. The value of your AVCs will also be paid.
Death Benefits:
Money Purchase members
For Money Purchase Scheme members, if you die whilst working for
the Company, the scheme currently pays twice your salary plus the
value of your retirement account. Members can also opt to pay for
a higher level of cover. Until 6 April 2006, the maximum lump sum
payable was four times your salary but after that date that limit
will be removed. The requirement to secure a pension for your dependants
will also no longer be necessary. Providing the benefits remain
within the available LTA, any lump sum paid will be free of tax
charges. Dependants will be given the choice of taking the benefits
as a pension or taking the whole amount as cash.
Flexible retirement and age discrimination
The new legislation allows individuals to draw a pension whilst
continuing to work if their employer adopts this option. It is hoped
this will encourage phased retirement, giving people additional
flexibility to reduce working hours in later life, if they would
like to and if their position and their employer allow. Kingfisher
has decided to adopt a policy of members taking their retirement
benefits and remaining in employment, if they would like to.
Coincidentally new legislation on age discrimination is due to
become effective in October 2006. This may tie in with flexible
retirement, so once the legislation has been finalised and the Company
has decided its policy, further information will be provided to
you.
Government White Paper – Security in retirement:
towards a new pensions system
Earlier this year the Government published its long-awaited Pensions
White Paper.
Some of the key components of the proposals are as follows:
State Reform:
- The basic State Pension will start rising in line with earnings
during the next parliament.
- State Pension age will rise to 66 by 2026, 67 to 2036 and 68
to 2046.
- The contributory principle behind the State Pension will be
retained, but it will be easier for people to qualify for contributory
pensions. People reaching State Pension Age from 2010 will only
need 30 years of contributions or credits to qualify for a full
basic State Pension.
Enabling and encouraging private saving:
- The creation of a new low cost savings vehicle providing fully
portable personal accounts with mandatory employer and employee
contributions.
- Auto-enrolment – which means that all employees will be
automatically enrolled into a pension scheme, either a suitable
employer scheme or into the new low cost pension arrangement.
The White Paper stresses that ‘Personal accounts are intended
to complement, and not replace existing pension provision from employers’.
The Government intends to consult further on the issue of the proposal
for personal accounts later this year.
|
