Category: Pension

If you live or move abroad, you are entitled to claim the State Pension if you have met the necessary qualifying criteria. This is based on your UK National Insurance record. You require a minimum of 10 years of UK National Insurance contributions to be eligible for the new State Pension. The New State Pension can be claimed if you reached your State Pension age on or after 6 April 2016.

If you reached the State Pension age before 6 April 2016, you will continue to receive the Old State Pension and not the New State Pension. The Old State Pension is made up of two parts, the basic State Pension and the additional State Pension. Both the basic and New State Pension payments are up-rated annually by either 2.5%, average wage growth or by prices growth as measured by the Consumer Price Index – whichever is highest.

In a recent announcement by the Work and Pensions Secretary, Amber Rudd, it has been confirmed that recipients of a UK pension living in the EU will continue to have their payments up-rated until March 2023, in the event of a no-deal Brexit.

This announcement should offer some comfort to almost 500,000 UK pensioners living in the EU. The Government has also confirmed that during this 3-year period they would seek to negotiate a new arrangement with the EU to ensure that up-rating continues.

Pension Wise is a free government service that was launched in 2015 to help provide individuals with general pension advice. However, the service does not answer specific questions relating to your pension. The main advice the service provides is generic and covers what you can do with your pension pot, the different pension types, how they work and what’s tax-free and what’s not.

The website lists the following six options:

1. Leave your whole pot untouched – You don’t have to start taking money from your pension pot when you reach your ‘selected retirement age’. You can leave your money invested in your pot until you need it.
2. Guaranteed income (annuity) – You use your pot to buy an insurance policy that guarantees you an income for the rest of your life – no matter how long you live.
3. Adjustable income – Your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.
4. Take cash in chunks – You can take smaller sums of money from your pot until you run out.
5. Take your whole pot in one go – You can cash in your entire pot.
6. Mix your options – You can mix different options. Usually, you would need a bigger pot to do this.

We would like to remind our readers that you can usually take 25% of your pension pot as a one-off lump sum without paying tax, but the remaining 75% is subject to Income Tax. Aside from the special tax-free benefits, pension income is treated as earned income for Income Tax purposes.

Private pensions can be an efficient way to pass on wealth, but it is important to consider what, if any, tax will be payable on a private pension you inherit. The person who died will usually have nominated you by telling their pension provider that you should inherit any monies left in their pension pot. If the nominated person can’t be found or has since died, the pension provider may make payments to someone else instead.

In general, if you inherit a private pension and the owner of the pension fund died before the age of 75, the benefits left in a private pension can be paid as a lump sum or drawdown income to you, with no tax to pay. If the deceased passed away after the age of 75 the pension will be taxed at your marginal Income Tax rate, so 20% if you are a basic rate taxpayer or 40% if you are in the higher tax bracket and 45% if you pay tax at the top rate. The rates may differ if you are a Scottish taxpayer.

There are restrictions on pensions from a defined benefit pot (usually workplace pensions). In these cases, the pension can usually be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. This rule can sometimes be changed if the pension fund allows, but the inheritance will be taxed at up to 55% as an unauthorised payment.

Take advice if you are in receipt of a relative's pension pot

The rules on inheriting a pension are complex and depend on what type it is and how old the holder was when they died. For example, you may also have to pay tax if the pension pot owner was under 75 but had pension savings worth more than £1,055,000 (the lifetime allowance) when they died. There are also important time limits that must be followed. It is also possible for a private pension you inherit to be passed down to future generations, IHT free. We can help you understand your options. Please note that the rules are different for inheriting a State Pension.

The annual allowance for tax relief on pensions has been fixed at the current level of £40,000 since 6 April 2014. Since April 2016, the annual allowance has been further reduced for high earners. Those with income in excess of £150,000 will usually have their allowance tapered. For every £2 their income exceeds £150,000 the annual allowance is reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.

However, any unused annual allowance can usually be carried forward to the current tax year and added to the current year’s annual allowance. The calculation of the unused annual allowance that can be carried forward can be complicated especially for those subject to the tapered annual allowance. There were also special transitional rules for tax year 2015-16 to align existing and new pension input periods known as the post-alignment and pre-alignment tax year. This meant that from the start of the 2016-17 tax year all pension input periods have been tax year based.

For the tax years 2016-17 to 2018-19, individuals can carry forward any annual allowance that they have not used in the previous four tax years to the current tax year, as follows.

• For tax year 2016-17 – from the post-alignment tax year, the pre-alignment tax year, 2014-15, 2013-14.


• For tax year 2017-18 – from 2016-17, the post-alignment tax year, the pre-alignment tax year, 2014-15.


• For tax year 2018-19 – from 2017-18, 2016-17, the post-alignment tax year, the pre-alignment tax year.

It is usually not possible to carry forward any unused annual allowance from the post-alignment tax year. Typically, this means individuals can carry forward unused allowance from up to three of the four previous tax years.

The government has confirmed that they are to examine a number of different approaches to help encourage the self-employed to save for their retirement. The success of automatic enrolment for pension savings for the employed has helped highlight that pension savings for the self-employed are lagging behind those achieved for the employed. In fact, government research has shown that only around 14% of self-employed people were saving into a pension in 2016-17.

The government has now decided that it is high time to encourage some of the 4.8 million self-employed people across the country to save for various short, medium and long-term financial goals (including retirement). The number of self-employed continues to grow and now makes up around 15% of the UK workforce. These measures are especially important for the many self-employed people that have made no provisions for the future and face reaching old age without the ability to properly support themselves.

Guy Opperman, Minister for Pensions and Financial Inclusion, said:

‘We want to see effective, long-lasting solutions that boost the future prospects of millions of hard-working self-employed people, and will work with the financial services sector, professional trade bodies, unions and others to achieve that.’

The government has said that new trials will be launched early this year and will include:

• encouraging employees who become self-employed to keep making regular, affordable, contributions to a pension or other long-term savings product
• better use of financial technology to help the self-employed overcome barriers to saving
• making the most of communication points of contact used by self-employed people – such as online accounting systems – to promote saving for retirement in an easily understood way.

Extending automatic enrolment to the self-employed is not on the current legislative list although it was an election manifesto commitment by the government. Only time will tell if this will be introduced although it is thought a roll-out of automatic enrolment for the self-employed would be a complicated move and may not be an ideal solution.

A ‘Check your State Pension age’ tool is available at www.gov.uk/state-pension-age/y. The tool allows taxpayers to check the earliest age they can start receiving the State Pension. The State Pension age is based on a taxpayer’s gender and date of birth and is subject to change as the State Pension age increases. The tool can also be used to check a taxpayer’s Pension Credit qualifying age and when they will be eligible for free bus travel.

The Department for Work and Pensions, has confirmed that the Government intends to follow the recommendations made by John Cridland in his independent review of the state pension age to increase the State Pension to 68 between 2037–39, seven years earlier than planned. These changes will require legislation which is not expected to be put in place before the next State Pension age review that needs to be completed by July 2023.

The change will not affect anyone born before 5th April 1970. However, those born between 6 April 1970 and 5 April 1978 will see their State Pension age increase to between 67 and 68 depending on their date of birth. Those born after 6 April 1978 will see no change to their State Pension age which was already set at 68.

Automatic enrolment for workplace pensions encourages many employees to start making provision for their retirement with employers, and as a bonus, government also contributes to their pension pot.

The law states that employers must automatically enrol workers into a workplace pension, if they are aged between 22 and State Pension Age, earn more than the minimum earning threshold (currently £10,000), work in the UK and are not already a member of a qualifying work pension scheme.

Employees can opt-out of joining the pension scheme if they wish. However, the government is keen to ensure that most eligible employees are members of a pension scheme. To help encourage this process, there is an automatic re-enrolment process that happens regularly every three years and in some cases on an immediate basis, if an employee or the pension scheme meets certain criteria. If staff members opted out before, or ceased active membership of the scheme, they’ll need to be put back in the scheme or to once again opt out.

Under the rules of the scheme, both the employer and employee need to make contributions. Currently, employees who are contributing to a workplace pension must contribute a minimum of 2% of their qualifying earnings. The level of qualifying earnings for 2018-19 is set between £6,032 and £46,350, so the relevant percentage is taken from the pay that falls between these two figures.

From 6 April 2019, the employee contribution will increase to 3%. Employers will be required to contribute a further 5% making for a total minimum contribution of 8%.

The annual allowance for tax relief on pensions has been fixed at the current level of £40,000 since 6 April 2014. The previous allowance was £50,000 and prior to 6 April 2011, the annual allowance was as high as £255,000.

The annual allowance is further reduced for high earners. Those with income in excess of £150,000 will usually have their allowance tapered. For every complete £2 their income exceeds £150,000 the annual allowance is reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.

The reduction in the annual allowance over recent years has meant that more and more taxpayers are exceeding their annual pension allowance and have tax to pay. Taxpayers will usually receive a statement from their pension provider telling them if they go above their annual allowance. This can be more complex if they have more than one pension scheme. Any additional tax due can be declared and paid as part of their Self Assessment. If the tax is more than £2,000 taxpayers can ask their pension scheme to pay the charge to HMRC from their pension pot. This means that their pension scheme benefits would be reduced.

Planning note

There are a number of ways to minimise any tax to pay. This can include:

• utilising the three year carry forward rule that allows taxpayers to carry forward unused annual allowance, and
• examining alternative savings strategies.

There is also a pensions lifetime allowance that should be monitored which is currently £1.03 million.

Employer contributions to any type of pension arrangement in a registered pension scheme are always paid gross. Tax relief is given by deducting the gross amount of the contributions from an employer’s taxable profits before Corporation Tax is calculated.

Employers’ contributions can normally be treated as a deduction for the accounting period in which the contribution is paid by the employer. The only exceptions are where the deduction is required to be spread over a number of periods or the deduction is allowed for an earlier period.

HMRC may require the tax relief to be spread over more than one period of account where there is an increase over 210% in the level of employer contribution from one period to the next. If the ‘spreading rules’ apply, the relief due to an employer on the making of a contribution to a registered pension scheme is not given entirely in the chargeable period in which the payment is made. Instead, part of the relief due is spread forward into future periods. This is a specialist area and advice should be taken before any payment is made.

Anyone aged 16 or over and at least 30 days from their State Pension age can request a State Pension statement from the Department for Work & Pensions (DWP). The statement provides an estimate of how much State Pension they can expect to receive when they reach State Pension age. The estimate is based on the applicant’s National Insurance Contribution record as it stands on the date the statement is produced.

An application can be made online, by post or by telephone. The statement is usually sent within 10 working days from the time the DWP receives the application. The statement also includes information explaining what effect further qualifying years may have on the amounts shown in the statement.

The statement includes the date the taxpayer will reach their State Pension age based on the current law. The State Pension age is regularly reviewed and may change in the future. The estimate does not take account of future payments.

Please note

If you do not have 10 qualifying years of contributions the statement will only tell you how many qualifying years you currently have. Taxpayers are usually required to make a minimum of 10 qualifying years to qualify for at least a part of their State Pension entitlement.

It is worth undertaking a regular check to help optimise your entitlement to the State Pension. You should also consider what other savings or pensions might be required to fund your retirement.

Following its annual review of the pension automatic enrolment earnings trigger and qualifying earnings band, the government has decided that the earnings trigger will again remain at £10,000 for 2018/19. The earnings trigger determines at what point an eligible person gets automatically enrolled by their employer into a workplace pension scheme.

The qualifying earnings band sets minimum contribution levels for money purchase schemes. The minimum of the band is also relevant for defining who can opt-in if they earn under the earnings trigger. The earnings band will continue to be aligned with National Insurance contribution rates, i.e. £6,032 for the lower limit of the qualifying earnings band and £46,350 for the upper limit.

The government also conducted a review of automatic enrolment during 2017 to explore ways that the policy could be further developed to encourage more people to save into a workplace pension and it has now published its report, “Automatic enrolment review 2017: Maintaining the momentum”. The report confirms the government’s intention to lower the age at which employers are required to auto-enrol employees into a workplace pension scheme from age 22 to age 18. It also sets out plans to change the framework so that pension contributions will be calculated from the first pound earned, rather than from the current lower earnings limit of £5,876 (rising to £6,032 for 2018/19). Removing the lower earnings limit would mean that everyone earning over £10,000 and under £45,000 a year (rising to £46,350 for 2018/19), and who meet the other eligibility rules, would be automatically enrolled by their employer and get pension contributions on eight per cent of all their earnings. Those earning at or below £10,000 would not be automatically enrolled; however, if they opt-in they would also benefit from pension contributions on 8 per cent of all their earnings.

The report predicts that this change would operate as an incentive to those with multiple jobs to opt-in to a workplace pension scheme, as they would benefit from an employer contribution for every pound they earn in every job, up to the upper earnings limit. The government intends that these changes will take effect in the mid-2020s, subject to discussions with stakeholders during 2018 and 2019 that will explore how to approach implementation.

Many commentators had predicted that the Chancellor would further reduce the annual amount that can be saved into a pension as part of the Budget measures. However, these fears appear to have been unfounded as no changes were announced.

The annual allowance for tax relief on pensions will remain at the current level of £40,000 for 2018-19. There is also a three year carry forward rule that allows taxpayers to carry forward unused annual allowance from the last three tax years if they have made pension savings in those years.

There is a tapered reduction of the annual allowance for high earners. Those with income in excess of £150,000 will begin to see their allowance tapered. For every complete £2 their income exceeds £150,000 the annual allowance is reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.

Planning note

There is a separate allowance known as the Money Purchase Allowance (MPAA) which applies once money has been taken from a pension pot. This allowance was reduced to £4,000 (was £10,000) from April 2017. The MPAA effectively stops an individual using the flexibilities to access a money purchase pension arrangement and then divert their salary into their pension scheme, gaining tax relief, and effectively withdrawing 25% tax-free.

One of the measures announced in the March 2017 Budget was the reduction in the annual Money Purchase Allowance (MPAA) from £10,000 to £4,000. This measure was subsequently dropped from the pre-election Finance Bill, but as expected, has now been included in the second Finance Bill of 2017 published earlier this month. Once the second Finance Bill receives Royal Assent, this measure will have effect from 6 April 2017.

The MPAA effectively stops an individual accessing a money purchase pension arrangement to divert their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25% tax-free. The reduction in the MPAA to £4,000 further restricts the amount of tax relieved contributions that can be made by an individual.

The government has indicated that this measure has been put in place to prevent inappropriate ‘double tax relief’ by those aged 55 and over who have already taken money from their pension pots. The change reduces the amount of pension savings that can be recycled to take advantage of tax relief, which is not within the spirit of the new flexible pension rules.

Planning note

These changes will also affect the available options for those who have already started drawing a pension to add more than £4,000 per year to their pension pots. We recommend that you take pensions and tax advice if you are affected by these changes.