inland revenue looks likely to lift restrictions for low earners on making additional payments into pension funds in the event of divorce
Lower earners who have lost out in pension terms as a result of divorce will be able to improve their situation under the Government's proposed lifetime limit pension fund system.
Head of pension strategy at Scottish Life, Steve Bee, said under the tax laws of the existing system, members of pension schemes can only accumulate a fixed amount of benefits related to their earnings and length of pensionable service.
In the event of divorce, the pension entitlement nominally earned to the divorce date can be split between the member and their former spouse. This can give the spouse a pension entitlement earmarked for them in a scheme or a transfer value of their share of pension rights for investment in a personal vehicle.
In such circumstances, the scheme member whose entitlement is split can be left with an irreparably damaged pension, even if they can afford to provide an amount sufficient to make up the deficit.
Existing rules prevent people adding to their pension in this way, despite the fact they have lost half its value, as they would technically have to exceed their allowed contribution limits, based on earnings and length of service.
Under the Inland Revenue's new tax proposals, such restrictions look as though they will only exist at the higher level of earnings, according to Bee.
When the proposals become legislation on the so-called 'A-Day', planned for April 2004, all existing benefit-limited pension tax regimes will be replaced by a maximum lifetime limit on pension savings of £1.4m, allowing people to repair depleted benefits.
Bee said: 'If you take the example of a man who has final salary benefits valued at £400,000, in the event of divorce, he has to give up half this entitlement to his ex-wife.
'Under existing rules, this would leave his pension crocked and him unable to do much about it. Under the new rules, all that would happen would be his lifetime limit of £1.4m would be reduced by £200,000. This leaves the scheme member plenty of scope to build up his pension again if he can afford to do so.'
If people go over the lifetime limit, a recovery charge is applied to the excess funds to recover the tax that would have been paid if the money had gone into a non-approved vehicle.
The Revenue believes this recovery charge will be in the region of a third of the value of the pot over the £1.4m limit. Income tax will also be levied on the remainder, meaning an overall penalty of 60% for excess funds.
While the Inland Revenue has stated its intention to implement its proposed changes to the pension tax regime in 2004, Bee believes A-Day is more likely to come in 2005 or 2006.
'Realistically, with the extent of these proposed changes being so broad, it will take some time for pension providers, scheme managers and administrators to rewrite and reconfigure their systems and processes,' he said.
'My guess would be 2005 at the very earliest but more likely 2006 if we want the transition to run smoothly and include all the customer awareness elements that will be an important part of such a far-reaching venture.'
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