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Employer > Trustee Zone > Trustees and A-Day > Trustees and A-Day
Trustees and A-Day
What is A-Day?
A new pensions tax regime was introduced on 6 April 2006. All existing pension tax regimes have been replaced with one unified system applying to all types of pension savings built up before and after that date. This day has become known as A-Day.
Every pension scheme and every individual with pension savings will be affected by the introduction of the new regime in one way or another.
How does this affect you as a trustee?
In terms of occupational pension schemes, if you have not already started to do so, trustees and employers, in conjunction with their advisers, should be identifying areas of existing schemes that need to be reviewed. You need to determine what changes, if any, need to be made to the level and structure of benefits that the scheme provides on retirement, death and leaving service.
So what has changed?
- The Standard Lifetime Allowance (SLA) creates a ceiling on the benefits value that can be built up by an individual in a registered pension scheme whilst continuing to benefit from tax relief. If the benefits value at vesting exceeds the SLA the difference between the two is subject to the Lifetime Allowance Charge.
The changes have increased the need for advice at the point at which benefits are taken. This is not just because of the Standard Lifetime Allowance (SLA) but due to the greater choices and options open to individuals, such as the different ways of taking benefits -which are now known as ‘crystallisation events' -and how they interact with the lifetime allowance or the impact of breaking the link between working and taking benefits.
- Under the new rules, the maximum amount of tax-free cash that can be paid out has changed. For most people, it means an increase in the maximum amount of tax-free cash that can be taken at retirement, but it depends upon whether the employer wants to offer this flexibility and has changed the scheme rules to allow it.
The new rules do offer greater flexibility, in terms of overall scheme design, and it could be an opportunity to review the whole benefit structure of the scheme to take account of this.
- The cap on member contributions of 15% of earnings has been removed. Scheme members can now pay the greater of £3,600 or 100% of earnings (subject to a cap of £215,000 p.a.) and employers can pay up to £215,000 p.a. irrespective of earnings (this annual allowance is proposed to increase to £255,000 by 2010). Payments in excess of the annual allowance or 100% of earnings will not receive tax relief. There is no requirement to change existing contribution levels, it is up to employers and trustees to decide.
- The existing earnings cap has also been removed. However, for some members maximum pension benefits will be based on a pensionable salary limited to the earnings cap (£108,600 in the 2006/07 tax year). Unless reference to the earnings cap has been removed, the scheme still has to restrict benefits to this limit even after A-Day, which it may or may not wish to do. It is also worth pointing out that the removal of the cap can mean open-ended contribution liabilities for the employer where contributions or benefits are based on X% of the cap. Once the cap has been removed, contributions and benefits can not be restricted in this way.
It is important all documents that relate to the scheme, for example, the trust deed and rules, have been reviewed in line with the above. All members of pension schemes should have been told about the changes.
How can Scottish Life help?
To help you review your existing scheme in conjunction with your professional advisers, we have produced the following documents:
Defined Benefit Scheme Review Checklist
Defined Benefit Scheme Review Key Issues
Occupational Money Purchase Scheme Review Checklist
Occupational Money Purchase Scheme Review Key Issues
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