FAQ's
NEW TAX REGIME
Why are the rules changing?
The Government believes that making pensions simpler will encourage people to
save. The current rules have been built up over the years in layer upon layer,
like a wedding cake. There are varying tax rules, benefit rules and administration
rules for differient types of scheme and even for individuals with different
starting dates. From 2006, the plan is to throw out many rules and start with
a new set that will apply to all pensions, regardless of when they started.
When will the new tax regime start?
The new pensions tax regime will be introduced from 6 April 2006.
What is the Lifetime Allowance?
This is a limit for allowable tax-privileged pension saving. Where individuals draw their pension benefits it will be necessary to test those benefits against the lifetime allowance. The maximum approvable benefits will now be those that are under an individual's lifetime allowance.
How much will the Lifetime Allowance be?
From April 2006, the allowance will be £1.5 million. It will then rise as follows: -
Tax Year - Lifetime Allowance
2007/08 - £1,600,000
2008/09 - £1,650,000
2009/10 - £1,750,000
2010/11 - £1,800,000
How will the Lifetime Allowance be calculated?
Pension rights under a final salary scheme will be valued by a standard valuation factor of 20:1. 25:1 will be used for valuing pensions that are already in payment.
Therefore in April 2006 the maximum approvable pension under a final scheme will be £75,000 (i.e. £1.5 million / 20).
For money purchase schemes, the market value will be tested against the Lifetime Allowance.
How will the Lifetime Allowance be used?
If you have never previously taken pension benefits, the whole of the Lifetime Allowance can be used in relation to effecting a pension benefit. Where benefits have previously been taken, the remainder of the Lifetime Allowance will be available.
PROTECTION
My benefits are already over the Lifetime Allowance. Can I protect them and avoid a tax charge?
Yes it will be possible to protect pre 6 April 2006 rights by one of two means, primary or enhanced protection. It will however be necessary to register protection with the Inland Revenue.
Primary protection will value an individual's pension rights on 6 April 2006 and the value will then be used to produce a percentage uplift to the lifetime allowance. For example, if registered benefits on 6 April 2006 were £2.25 million this would equate to 150% of the lifetime allowance. Benefits would then be protected from the recovery charge until the value exceeded 150% of the Lifetime Allowance at the point they were drawn.
Enhanced protection will require an individual to cease being an active member and opt out of future registered pension provision before 6 April 2006. No further contributions are allowed, but benefits regardless of their value can be taken without the application of any recovery charge.
How do I register?
Rights should be registered with the Inland Revenue within 3 years of 6 April 2006. However, if enhanced protection is sought, no further contributions or accrual of rights are allowed post 6 April 2006. Therefore in reality, a decision will have to take place before 6 April 2006. Members can however elect for primary protection at a later date.
Once funds have been registered with the Inland Revenue they will issue a certificate to the individual.
What happens if I have unprotected benefits in excess of the lifetime allowance?
A recovery charge will be applied to the excess over the lifetime allowance. The amount will depend on which option you elect to receive the benefit that is in excess. If pension is elected, the excess will be subject to a 25% tax plus the normal tax payable on receipt of their pension. If cash is elected, it will be subject to a one off 55% recovery charge.
Who is responsible for paying the recovery tax?
The onus will be on the member but in practice KPS will be expected to deduct this tax at source and pay it to the Inland Revenue.
Where the member resides abroad, responsibility will rest with the scheme administrator.
What is the Annual Allowance?
The annual allowance will replace the existing maximum annual contribution limits to approved pension plans. For final salary it will be the maximum allowable increase in accrual in a year. For money purchase schemes it will be the maximum amount of contribution in a year.
How much will the Annual Allowance be?
The Annual Allowance: 2006/07 to 2010/11
Tax Year - Annual Allowance
2006/07 - £215,000
2007/08 - £225,000
2008/09 - £235,000
2009/10 - £245,000
2010/11 - £255,000
Individuals will be able to contribute up to £3,600 or 100% of earnings if greater, subject to the above Annual Allowance. Contributions made by an Employer count towards these limits.
How will the Annual Allowance be calculated?
For money purchase schemes, the allowance will be tested against the total amount of employee and employer contributions paid to the scheme during the year.
For final salary schemes, the increase in a member's benefit from the beginning of the period to the end of the period will be valued by a valuation factor of 10:1.
What happens if I contribute more that the Annual Allowance?
There will be a tax charge of 40% on the excess.
Will my contributions to the AVC plan count towards the Annual Allowance?
In the KPS-FS, your contributions to your AVC plan will count towards the Annual Allowance. In the KPS-MP, your contributions to your AVC plan will count towards the Annual Allowance.
If the fund value in the KPS-MP falls one year. Can I use this fall to increase my annual allowance and pay more the following year?
No. Contributions made to a money purchase scheme will count regardless of the investment performance.
What about for final salary benefits?
No. Any fall in value of an individual's final salary benefits in one year cannot be used to offset changes in another.
Can I contribute to more than one pension scheme at the same time?
Yes, there will be no restrictions on the number of pension plans that you can contribute to. The only restrictions will be level of tax efficient pension saving you can make, which will be limited by the Annual and Lifetime Allowances.
Will I now be able to use my AVC fund to provide a cash sum?
Yes, the requirement that AVCs paid after 7 April 1987 must be used to provide a pension is to be removed and therefore AVC funds can be used to provide a cash sum within the overriding cash limits.
ILL HEALTH BENEFITS
I am suffering from serious ill health. Will I be able to retire earlier than 55 years?
Incapacity early pension at any age will continue in the new regime. The availability of and the criteria for ill health early retirement are stated in your pension scheme booklet.
TRIVIAL PENSIONS
I have heard that trivial pensions of up to £15,000 can be exchanged for cash. Is this true?
Under the new regime, where an individual has pension benefits not exceeding 1% of the Lifetime Allowance it will be possible that these pensions can be commuted in their entirety for cash. Using a Lifetime Allowance of £1.5 million (2006/07) this will allow you to receive up to £15,000 on triviality grounds.
However, the total of all your pension rights must not exceed 1% of the Lifetime
Allowance and commutations must take place within a 12 month period between
your 60th and 75th birthday.
So if I have one pension plan worth £8,000 and another worth £9,000,
will I be able to cash them both when I'm 60 years in May 2006?
No. As both plans together exceed 1% of the Lifetime Allowance, the maximum level of cash that can be taken will be limited to 25% of the capital value.
FLEXIBLE RETIREMENT
Can I continue to work and a draw a pension from the KPS?
Although the Inland Revenue did not previously allow this, the new regime will allow you to continue working and draw a pension from the same employer. However, although the Inland Revenue will now have no objection, this relaxation is not overriding on scheme rules. We are currently looking into this and will advise you when a decision has been made.
EARLY RETIREMENT
When are the changes to early retirement age effective from?
Early retirement age will rise from 50 to 55 by April 2010. This can be phased in or implemented in one go. We will implement this in 2010.
But I reach age 50 in May 2010. If I apply for it before April 2006 will I be able to take early retirement from the KPS?
No. I am afraid the rules are effective from 6 April 2010 so that any retirements after this date will be subject to the new legislation.
AVCS
Will the KPS still be offering Additional Voluntary Contributions (AVCs)?
From April 2006 the requirement for occupational pension schemes to provide an AVC facility will be removed. We will still be keeping an AVC scheme for now.
TAX FREE CASH
What are the changes to the tax free cash lump sum I can take?
From April 2006 tax free cash will be 25% of the capital value of a member's pension fund and can include any AVCs.
For KPS-MP members the formula is a straight 25% of the fund value.
For KPS-FS members the formula is not as simple and results will vary depending on the scheme's commutation factor. We will be offering the new tax-free cash formulae from April 2006.
I am a pensioner. I believe that if I had retired post April 2006 I would have
had the opportunity to take a higher tax free lump sum. Will the Trustees recalculate
my pre April 2006 benefits in accordance with the new rules?
No there is no requirement to do this.
INCREASES TO PENSIONS IN PAYMENT
So what is happening to Increases to pensions in payment for final salary members?
For benefits accruing post April 2005, the statutory increase in payment will be reduced from 5% or RPI whichever is the lower to 2.5% or RPI whichever is the lower. For now we will be keeping the increases as they are, so that benefits accruing post April 2005 will increase at 5% per annum or RPI whichever is the lower.
EMPLOYER CONTRIBUTIONS
Will the company pay toward my personal pension in addition to the KPS?
Employers will be able to pay into an individual's personal pension or stakeholder plan as well as their occupational scheme under the new regime. It has been decided that we will only pay into an employees Kingfisher Scheme.
EARNINGS CAP
What is the 'Scheme specific earnings cap'?
Before 6 April 2006 members who joined a pension scheme from May 1989 are subject to an upper limit of earnings that can be used for pension purposes. This is known as the Earnings Cap. From April 2006 the Earnings Cap will be abolished. Occupational pension schemes will be able to set their own cap known as the 'scheme specific earnings cap'. We will therefore keep the existing scheme earnings cap and it will be increased each year in line with increases in the RPI.
FURTHER INFORMATION
Where can I go for more general information on the changes?
The following links may be of use:
HM Revenue & Customs Website
www.hmrc.gov.uk
Free information and guidance on pensions
www.pensionsadvisoryservice.org.uk
Department for Work and Pensions
www.dwp.gov.uk
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