The imminence of A-Day and 'pensions simplification' will herald changes to the amount of tax-free cash at retirement individuals can 'lock' in under an occupational pension scheme, before April 2006.
After this date, tax-free cash will be 25% of the fund, however, financial services company, Barnett Ravenscroft argues people could draw out as much as 100% of their fund, before the new rules from the Inland Revenue fall into place.
The company says people are still able to take advantage of existing rules under the Finance Act 2004 and is of particular application to self-administered schemes and those who have not yet made major contributions towards pension provision.
Present laws for occupational pension schemes arranged by company employers dictate the maximum benefit provided for retirement, with the maximum pension up to two-thirds of an employee's final salary (technically a final pPart of this benefit may be taken as a cash lump sum instead), while the maximum amount to be drawn out in this manner is one and a half times a person's final salary.
According to Barnett Ravenscroft, generally 40 years service is needed to be eligible for such a cash sum, however it can be far less for people who started their pension scheme before the 1987 budget.
For those people 'pre-1987' by definition with a minimum 18 years service and can achieve close to the optimum level.
While many factors means individuals need to be looked at on a case-by-case basis, Barnett Ravenscroft says:
“You are not required taking any of your retirement benefits as pension - if you are within the maximum cash sum limit, you can take the entire amount as a tax-free lump sum.”
The company argues while in most cases this only applies to a money purchase scheme, 'final salary' benefits can be converted into money purchase benefits by transferring them from the employer's scheme into a 'Buy-out' policy with an insurance company - commonly referred to as a "Section 32" transfer policy.
It warns of extreme caution to be applied to pension transfers in reference to the notorious SIB/FSA Pensions (mis-selling) Review.
The company adds it is not necessary to have reached the retirement age to be able to benefit from a pension scheme or buy-out policy, as pensions rules permitting retirement between the ages of 50 to 75.
Richard Wood, managing director of Barnett Ravenscroft Financial Services says a short window in the lead-up to A-Day will enable some individuals to take the whole of their pension as a tax-free cash lump sum.
Wood provides the following example:
"A company director, started his business 25 years ago, currently aged 55 and earning £50,000. He has never paid into a pension plan of any sort, like many in his position whose view is 'their business is their pension' or that any surplus should be invested in other ways, such as property, either here or abroad. Our man has just had a good year and was proposing to pay himself a bonus of £25,000.
"If he started an 'executive pension plan' now, he (or, to be correct, his company) could pay a contribution of £25,000 into it. If he had taken that as a bonus he would have had just £15,000 in his hand after tax (ignoring any effects of NI contributions, for simplicity).
"Under current Inland Revenue rules, if he decided to retire now he would be entitled to take a cash sum up to a maximum of £46,875, so he could easily take his whole pension fund of £25,000 (or probably a bit less than this, after fees/charges for setting it up) as a tax-free lump sum.
"Tempting though this is, he realises in another year's time, when he is confident he will have had another good year, he could pay another £25,000 into the pension and his fund should then be worth £50,000 (plus a year's growth and less charges).
"Meanwhile, his maximum cash sum entitlement should have risen to slightly over £50,000, so he could retire then instead and receive the full £50,000 tax-free.
"Alternatively, if he decides not to retire then but waits till after the new pensions 'simplification' rules come in on 'A-Day', based on these predictions he will be able to 'lock in' a cash entitlement of 100% of the value of the existing fund, to be taken when he does eventually decide to retire (or, more simply, when he just decides he wants to take it).
"The available cash sum in his plan at 'A-Day' will increase in line with increases in the new "Statutory Lifetime Allowance" (SLA), already promised to rise 20% from £1.5m in 2005/06 to £1.8m in 2010/11 - provided the fund itself grows at least that fast, of course."
Wood adds the tax-free cash sum can even be further increased during the following years, if fund growth outpaces the SLA, by paying a nominal post-A Day contribution into the pension plan.IFAonline
Slow progress in improving diversity
Share purchase deal with assets of £28m
Came into effect in January
Three examples of compensation rule issues
Buying in baskets