Don’t be caught out by Osborne’s raft of reforms to pension system

Chancellor George Osborne
Chancellor George Osborne
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CHANCELLOR George Osborne has implemented wide-ranging pension reforms because he believes they will make millions of people better off.

However, Stephen Baxter, a Yorkshire-based independent financial adviser is urging people to ensure they are prepared for a raft of pension reforms that come into effect on April 6, particularly if they have significant sums already placed in their pension funds.

According to the Department for Work and Pensions, the move to the new system will provide a boost to the state pension for many women, with more than three million women receiving an average of £11 more per week by 2030, as a result of the changes.

Earlier this month, Baroness Altmann, the Pensions Minister, said that huge efforts have been put into reforming the “mind-blowingly” complicated state pension system, into something that over time, will be clearer to everybody.

Mr Baxter, of Huddersfield-based Robertson Baxter, highlighted the fact that from April, the total amount that can accumulate in a pension fund – or funds – without suffering tax charges in the future will reduce from £1.25m to £1m.

Additionally, those whose total income – from all sources, not just salary – exceeds £150,000 per annum, the maximum amount that can be added to the pension fund in any one year may reduce from £40,000 to £10,000 on a sliding scale, Mr Baxter said.

There are also changes to the state pension. The full new state pension will be £155.65 a week from April 6, 2016.

You will usually need at least 
10 qualifying years on your National Insurance record to get any State Pension under the 
new scheme. The amount you get can be higher or lower than the full new state pension, depending on your National Insurance record.

Mr Baxter said: “Everyone’s situation is different, but the message is the same – act now or you will not have time to safeguard against these changes.”

As in previous years, when the total amount – the Lifetime Allowance – has reduced, it is possible to secure a higher figure subject to certain conditions, Mr Baxter said.

“If your pension funds are currently worth less than £1.25m but you don’t need to take money out of the funds for a number of years, you may be concerned that with investment growth the total may exceed £1m in the future,” said Mr Baxter, whose firm handles financial planning for high net worth individuals across the region.

“In that case Fixed Protection 2016 may be appropriate for 
you. You do not have to provide a value of your pension fund, but you do have to stop paying into a pension, or accruing benefits other than inflationary increases within an employer’s scheme, from April 6, 2016.

“If you have not contributed the maximum in previous years to your pension, then it may be worth considering doing a ‘catch up exercise’ prior to April 5, 2016, then applying for Fixed Protection.

“However, a realistic view needs to be taken of future investment growth – a large lump sum paid in, albeit with tax relief at your highest rate, would only be taxed quite heavily when benefits are taken.

“The best course of action is to speak to an IFA for help with the calculations and a personalised explanation of the tax implications.”

According to Mr Baxter, there are potentially a large number of people in Yorkshire with pension funds that exceed the new limit of £1m.

Mr Baxter said: “For those with total pension funds already in excess of £1m, then Individual Protection may be more appropriate ... this gives them a personal Lifetime Allowance equivalent to the value of the pension fund at April 5, 2016 subject to a maximum of £1.25m. Contributions can continue, but any contributions and investment growth risks taking the total fund value higher than the protected level.

“Applications for individual Protection will only be permitted online, and this is not available until summer 2016.”

Neither form is straightforward so the best course of action is to speak to a qualified IFA, Mr Baxter said.

At the heart of the new state pension is the concept of a clearer, single payment for the future, according to the Department for Work and Pensions.

In a statement, the DWP said: “Many of the complexities which have 
built up over decades will 
be swept away and, after 
April, there will be a much more straightforward system.”

Pensions Minister Baroness Altmann said: “Millions stand to gain from the changes to the new state pension, including women and the self-employed, who so often lost out in the past.”

Baroness Altmann said that data compiled on behalf of the DWP also show that more than 70 per cent of people who have been contracted-out during their working lives stand to gain from the new state pension.

More information about the new state pension is available at www.gov.uk/yourstatepension