Make the most of your pension perks before A Day deadline

“It is taking an inordinate amount of time to get vital information out of insurance companies,” warned Mike Nevill of Vantis, a financial adviser.

Some are taking more than a month just to send out simple information such as pension-fund valuations.

We analyse who should be taking action now — and what they should be doing.

I’m in a company scheme. What should I do?

If you are close to retirement you may want to delay retiring until after A-Day to take advantage of more favourable benefits that will apply then.

Under the new regime you may be able to take more of your fund as tax-free cash. At the moment, company-pension rules usually allow you to take a maximum of only 1.5 times of your final salary as tax-free cash.

From April 6, you will be able to take 25% of the value of your whole fund, including additional voluntary contributions and opted-out benefits from the state second pension.

It will no longer be necessary to stop work before taking benefits from a company scheme. You can even stay working for the same employer. Nor will you have to take all benefits at the same time.

However, there is no guarantee that the trustees of your company pension will adjust the scheme’s rules to reflect the new regime, so ask them about their plans.

I am saving into a personal pension. Can I still claim tax relief on past pension contributions?

This month is the last chance most pension savers will have to claim unused tax relief from earlier years, using the carry-back scheme. After that the scheme is being abolished as part of the A-Day changes.

If you did not use your full personal-pension allowance in the tax year to April 6 last year, you have until January 31 to make extra contributions and treat them as though they had been made in the previous tax year.

Savers with old-style retirement annuity contracts (Racs) have until April 5 to make contributions for the 2004-5 tax year.

To use carry-back you must make a “carry-back election” and lodge it with your pension-scheme manager. This has to be done at or before the time you make the payment.

You can download the form PP43 from the Revenue & Customs website, hmrc.gov.uk.

Carry-forward, which permits you to use up unused contributions from even further back, was abolished for personal pensions in 2002. But savers with Racs can still carry forward. It can be used in conjunction with carry-back or on its own.

By itself, carry-forward lets you salvage unused contributions from the previous six years. So savers can make contributions up to their annual limits from as far back as the 1999-2000 tax year.

If you combine it with carry-back, you can go back seven years, to the 1998-9 tax year. To carry forward, ask your local tax office for form PP42.

The deadline to make carry-forward contributions is April 5 this year.

There will be a tax on larger pensions. How do I avoid it?

From A-Day there will be a new cap on the value of your retirement fund. Called the lifetime allowance, it will be set at £1.5m in April 2006, rising to £1.8m by 2010. If you have several pension schemes, they will all count towards the limit.

You will be liable for a 55% tax charge on any amount above the lifetime allowance. So, if your pension pot was worth £1.6m at retirement and the allowance was £1.5m, you would pay tax at 55% on the £100,000 excess, resulting in a charge of £55,000.

There are ways to escape the tax, but you need to act quickly. Ask your employer’s pensions department, or your insurance company or financial adviser, to estimate what your fund is worth now, in April and at retirement to find out if you will breach the allowance.

With personal pensions and money-purchase company plans the calculation is simple: compare the fund value with the lifetime cap. With final- salary company pensions, however, it is more complex. You will be deemed to have a fund worth 20 times your income in retirement. So a final-salary pension paying £75,000 a year will be deemed to be worth £1.5m.

You will be able to register your funds on A-Day or up to three years after, to protect yourself against the charge. But the decision about whether to register needs to be made before A-Day or you could lose out.

There will be two types of protection — primary and enhanced.

Enhanced protection is open to everyone. It shelters your entire fund from the tax charge, but you must stop all contributions by April 5 this year.

Primary protection is available only if your fund is worth more than £1.5m on A-Day. It preserves any excess you have above the £1.5m allowance. So, if you register a £3m pot your personal allowance will be fixed at twice the lifetime limit.

Your personal entitlement will increase in proportion to any rise in the lifetime allowance. If the allowance jumped to £2m, and your personal entitlement was twice the lifetime limit, yours would rise to £4m.

If your expected final-salary pension is £150,000 a year at A-Day — twice the limit — you can register for primary protection and stay at twice the limit.

You can continue paying into your pension, but if the fund grows faster than your personal limit you will have to pay the 55% tax charge on the excess.

My fund will be worth more than £1.5m on A-Day, so I can choose between enhanced and primary protection. Which is better?

If you want to continue contributing to a money-purchase pension or accruing benefits in a final-salary scheme, you will have to go for primary protection. Otherwise, pension consultants recommend applying for both types of protection.

Where both forms of protection are chosen, enhanced protection takes precedence. While it is operating you cannot make contributions.

But if you want to start paying into your pension again in the future this allows you to switch automatically to primary protection.

Richard Meek at Punter Southall, a consulting actuary, said: “If your fund suffers poor investment returns and loses value, this gives you the leeway to top up your pension.”

Your personal allowance under primary protection will still be based on the value of your fund on April 5 this year.

I am already retired. Is there anything I should worry about?

Many savers have more than one pension. They may have decided to retire and draw an income from one pension fund but leave the others invested. If so, they could be caught by the 55% lifetime-allowance charge.

You should check the value of your pensions if you are in this situation. The taxman will take into account all of them, including the one from which you are drawing an income.

Multiply the pension income you are drawing by 25 to come up with a fund value, and then add up the value of the funds that remain invested.

If the combined value is more than £1.5m you will be liable for a tax charge of 55%. You can apply for protection.

It is possible to invest in commercial property using a pension, but after A-Day the borrowing rules become less attractive. Is there still time to beat the deadline?

Andy Bell of AJ Bell, a self- invested personal pension (Sipp) administrator, said: “If you want to take advantage of the existing borrowing rules you need to start the transaction by the end of January. If the deal isn’t completed by April 6 it could be costly.”

At present, a Sipp can borrow 75% of the value of a property. So if you wanted to buy premises worth £400,000, you would need a £100,000 deposit in your pension and the trustees could borrow the rest.

Many commercial-property purchases require the payment of Vat at 17.5%. Under the current rules Vat can be ignored.

After A-Day you can borrow only 50% of the value of your fund and Vat will have to be included within the new borrowing limit. So in the above example, you would be able to borrow £150,000 but £22,340 of that may go towards Vat, leaving you with only £127,660 to buy a property.

The new borrowing rules will be applied from A-Day, so if you don’t beat the deadline your plans could be scuppered. You will be able to borrow more than the rules allow but anything in excess of this will be taxed at 40%.

Sipp firms are pressing the government to allow the existing borrowing rules to continue beyond A-Day. They point out that one of the reasons for tightening the rules was that residential property would be included in pensions from April 6.

Now that the government has gone back on that promise there is no reason for the rules to change. But so far the government has refused to budge.

I am entitled to more than 25% tax-free cash. Can I protect my entitlement?

Some members of company-pension schemes are entitled to take more than 25% as a tax-free lump sum under the current rules. If you are over the 25% limit your entitlement is automatically protected, but you still need to take care. You will lose this extra allowance if you transfer your pension after A-Day.

If you are happy with what you have got, you don’t necessarily have to do anything, But if you are in a poor fund, now is the time to do something about it.

Many advisers recommend that you move into a “section 32” contract before A-Day. This is a special type of arrangement for transfers out of company pensions. It is your own individual plan, but you can ringfence the benefits you would have received from your employer’s scheme.

I am a director. Should I set up an executive plan?

Executive pension plans (EPPs), aimed at directors, and small self-administered schemes (SSASs), used primarily by business owners, benefit from generous perks that will be lost after A-Day.

Under the current rules, the whole value of an EPP can be taken as tax-free cash as long as the value of the fund is less than 3/80ths of final pay, multiplied by the number of years worked.

If you have 20 years of service and earn £100,000 in the year before retirement, you can take £75,000 tax-free provided you have sufficient funds in your EPP.

Under current rules, business owners who have not used up their pension allowance in previous tax years can make extra contributions to an executive pension plan.

Suppose you started a company in 1986, but haven’t made any contributions. By setting up an EPP now you can claim years of service right back to 1986.

Business owners who are saving into an SSAS may also want to act now. The schemes are popular with small businesses because they can be used to invest in the assets of the firm. After A-Day there will be tighter restrictions.

At present, up to 50% of the assets of the pension fund can be invested in the firm via loans or shares. From A-Day only 5% can be used to buy shares. Half of the assets can still be used for a loan, but the maximum term will be five years and it will have to be secured.

ADVISER PRACTISES WHAT HE PREACHES

TOM MCPHAIL, head of pensions at the Bristol financial adviser Hargreaves Lansdown, practises what he preaches. McPhail, pictured with his girlfriend, Helen, and son Jackson, has been urging pension savers to claim unused tax relief from earlier years using the carry-back scheme — and has just taken advantage himself. McPhail, 39, didn’t make full use of his personal pension allowance in the 2004-5 tax year. Carry-back has allowed him to put funds into his pension now and treat them as though they were made in the previous tax year. ‘At the end of this month carry-back will be abolished for good as part of the A-Day reform, so savers need to get a move on if they want to benefit,’ said McPhail.

A LAST-MINUTE SEARCH FOR A NEW OFFICE

MARTIN GRAY, 59, and his wife, Anne, 54, manage a successful business owning and running holiday parks and a care home in southern England.

They had been looking for new business premises for some time, but their search was given an added urgency after their adviser at the Sipp administrator AJ Bell told them that the borrowing rules will become less generous in April. They have since found a suitable new office development and are buying two of the offices there.

Martin said: ‘We want to take full advantage of the current rules to borrow 75% of the property’s value. We have received assurances that the transaction will be completed before the A-Day deadline.’

If the deal were completed after April 5 they would be able to borrow only half the value of their fund.

A-DAY SUMMARY