Minimum Pension Age Change
Updated: 3rd December 2008
Currently pension benefits can be taken at any time from age 50 onwards. However from 6th April 2010, this minimum age is increasing to age 55. What many people are unaware of is that this change is happening overnight, with no transition provisions for those in their early 50s.
This means that on 5th April 2010 someone aged 50 could take their pension benefits. However the very next day, they would have to wait for five years before being able to take their benefits. Although this change is over a year away, it has not been very well publicised by the government meaning that many people may have their minimum pension age increased without realising it.
Pension benefits can be taken as 25% of the fund as a tax-free lump sum. The remainder of the fund can be taken at any time before 75 as an income. There is no need to take both at the same time and we are seeing increasing numbers of clients take their tax-free lump sum at a different time to their pension.
This rule change has implications for some of the larger tax planning exercises which we often arrange for clients. Currently if a higher rate tax-payer was to pay £80,000 to pension, the Inland Revenue would automatically add 20% basic rate tax relief to it making a gross pension fund of £100,000. A further 20% income tax can then be reclaimed on this making the net cost only £60,000.
If the client is over 50, he can immediately elect to take 25% of his pension fund as a tax-free lump sum of £25,000. The remaining pension fund of £75,000 can stay invested until the client wants to take a pension from it. This means that the final cost to the client has only been £35,000. So instead of paying a tax bill of £40,000, the client gains a pension fund of £75,000 for a real cost of only £35,000.
Many people in their 30s and 40s have focussed on building up their business and often have no real pension funding. Many of these are looking to make very large pension contributions, often from the proceeds of selling their business. There are special rules allowing extremely large pension contributions (up to £1.65 million) in the year that you take pension benefits. This means currently that clients aged over 50 are able to benefit from this.
Selling your business and planning your retirement is not something that happens overnight. So this is why we feel it is important to highlight this rule change now so that there will be time to identify who might be impacted by it.
If you have any clients who want to make the most of pensions and tax relief, then please make sure that they don’t get caught out by this rule change. Clients born between April 1955 and April 1960 will be affected.
For more information:
To Submit Content For Inclusion, Contact:
