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BeeHive  >  BeeLines  >  Pensions for high earners 5

Pensions for high earners 5

"Will it be possible to avoid the 60% tax?"

You will probably get more out of this particular BeeLine if you read an earlier BeeLine first - Pensions for high earners 2 “What if you go over the Lifetime Limit?”. In case you haven’t, here’s a link;

Pensions for high-earners 2

If you can’t be bothered just a brief summary before I get going. A sort of ‘story so far’, if you like.

Some high earning people in the work force will find that if the proposed new Lifetime Limit on individual pension savings of £1.4 million comes into force they will have to give up membership of their pension schemes even though they will still be at work. The reason for this will be because they will already have pension funds valued at more than £1.4 million. Lucky them. Yes of course, but this is a very new concept the Inland Revenue are thinking of bringing in here and one that needs a bit of understanding. Basically it means that high earning people will not be able to save for a pension for the whole of their working lives any more. Once their pension pot is full, that’s it. The fat lady will have sung, sort of thing. Any more money going into the pot will be hammered with a sixty percent tax and recovery charge, so the Lifetime Limit is likely to be adhered to by all sensible people. It’s not there as a challenge like the speed limit on the motorway or anything like that. This limit’s for real.

Now, some people who are already over the Lifetime Limit when these new rules come in will also be over the age of 50 at that time too. It seems to me that could be significant and may lead to some such people taking some immediate action with their pension as soon as they can after the implementation date (which is known in pension-speak as ‘A-Day’).

The problem with being over the limit will be that any increases to a person’s pension fund will trigger-off the recovery charge and it won’t matter whether those increases come from extra contributions or from good fund performance. If you go further over than you’re allowed to, the charge kicks in.

For people who can do it, ‘Income Drawdown’ looks a good bet if they don’t want to risk being taxed on any future growth in their pension fund due to good investment performance. In Plain English, it looks like people going into ‘Income Drawdown’ may keep any extra fund growth from their pension investments, whereas those not doing so may not. Actually, that’s not as Plain English as I wanted it to be, but you know what I’m getting at.

The problem at this stage is, though, that the rules around ‘Income Drawdown’ are changing too, and that’s why I keep putting inverted commas around ‘Income Drawdown’ to distinguish it from the [non-inverted comma type] Income Drawdown rules we currently know and love. Which makes writing this sort of stuff pretty fiddly to say the least. I’ll struggle on, though; see if I can get through it.

Under the current rules you are deemed to be vesting your total benefits when you take Income Drawdown (unless you take Phased Income Drawdown, but I don’t want to get into that right now). If this doesn’t change when the new ‘Income Drawdown’ rules come into force at ‘A-Day’ then I think that means that the pension pot not used immediately for income will be able to benefit from further investment growth until an annuity is eventually purchased. Maybe twenty five years later for someone going into drawdown at age 50. This is particularly interesting because one of the new, and very welcome, rules being proposed for the new approach to ‘Income Drawdown’ post ‘A-Day’ is that the minimum annual pension that people will be allowed to draw down will be just one pound. So, if a pension pot of £1.4 million is invested in the new ‘Income Drawdown’ way after A-Day and just one pound a year is taken as income, then the remaining pot will be able to benefit from increases in investment returns until an annuity is eventually purchased. Or, it will be able to as long as the new rules for ‘Income Drawdown’ are the same as the existing ones in the way they regard total benefits as having been ‘vested’ or not.

This is obviously crucial and mind-blowingly tricky to get your head around at the same time. What it boils down to is this;

  • Going over the Lifetime Limit looks unattractive as fund growth could become taxable for some people.
  • People over 50 will be able to go into a new type of ‘income drawdown’.
  • Going into drawdown may mean fund growth will not be taxable and only one pound a year will need to be drawn down.
  • Nothing will be certain until the full details of the new tax proposals are published.
  • But, it looks pretty interesting from what we know so far.

This is clearly something we will need to keep track of as it moves through the proposal stage to eventually becoming law. Keep popping into the BeeHive and I’ll make sure you’re kept up-to-date on this important topic.

Is it me, or are pensions becoming fun again?

Steve Bee
27 February 2003

This document is based on Scottish Life’s understanding of the current tax law and the Inland Revenue’s proposals and the Pensions Green Paper issued on 17 December 2002. These proposals are subject to consultation and may change in future.