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Miscellaneous

Q: Pension laws re: performers

I keep hearing the pension laws have changed. Is this good news or bad for performers like me?

A: Yes indeed, major changes have been introduced by the government with effect from April 6, 2006, known in the pensions industry as "A-day" but whether they are to be regarded as good or bad for performers depends on one's point of view and on individual financial circumstances. I suspect that for most performers on modest incomes it will make little difference. You can judge for yourself from what follows.

From A-day the previous restrictions on the amount of annual permitted contributions into a person's pension scheme (based on a percentage of earned income) are cancelled and instead are now limited to £215,000 per annum or 100% of annual earnings, whichever is the lower. This figure will rise by £10,000 per annum until it gets to a maximum of £255,000 after four years but in any event I imagine it is well out of the reach of most performers. It does, however, represent a considerable relaxation of previous limits.

Also after A-day the lifetime maximum size of an individual pension pot is £1.5 million, rising by degrees annually to £1.8 million over four years and is again believed to be out of reach of most performers, bearing in mind that the average pension pot nationally is a tiny fraction of this amount but for very high earners at the top end of the acting profession it may be regarded as an inhibiting factor. Prior to A-day there was no upper limit. The new limit may be exceeded but if so the excess is subject to a penal tax charge (up to 55%), making any voluntary (as opposed to inadvertent) excess counterproductive.

Relief is available for persons whose pension pot was already in excess of the limit on A-day, by allowing them to elect for primary protection of their fund, which means that no further contributions may be put into their fund in future but the value of it on A-day will be allowed to grow in line with the annual increases in the lifetime allowance without becoming liable to the excess tax charge. The time limit for making this election is three years from A-day.

Irrespective of the size of his/her pension fund, an individual can also elect within the same three-year time limit for enhanced protection, which means that any further growth in the value of the fund will not attract the excess tax charge even if such growth pushes the fund value over the upper limit, provided no further contributions are made into the scheme after A-day.

Previously, it was compulsory to use one's pension fund to purchase an annuity at the age of 75, subject to being able first to withdraw up to 25% in a tax free cash lump sum. However, in future it will be possible to elect for an "alternative secured pension", which enables the pensioner to maintain control over the investment of his/her pension fund (if self-administered) and have it passed on death to any dependants' pension funds, or if none, to other scheme members or a charity, instead of dropping into a pooled fund for the benefit of the pension provider but the downside is that the maximum income which can be taken from the scheme is 70% of the market annuity rate for the then current age and sex of the pensioner, reviewed annually up to the age of 75 and thereafter calculated at that fixed age. It is therefore an option to be treated with the utmost caution and is regarded as mainly suitable for persons with a religious objection to pooled fund annuities. An 'ASP' may be converted into a conventional annuity at any time.

Broadly speaking, the option of withdrawing a 25% tax free cash lump sum remains as before but since A-day this can now be done without having to take an income from the fund, provided the person is over 50 years of age at the time of withdrawal.

Finally, it is now possible to provide for one's retirement by subscribing for as many different pension schemes as one likes, even by putting contributions into more than one scheme in the same year and some of the pre-existing restrictions on the type of permitted investment in self-administered schemes have been relaxed.

The above is just a broad outline of the principal changes. There are numerous technical refinements and it is invariably desirable to seek advice from an experienced, independent pensions consultant, particularly before exercising any of the options which are available.

First published 29th November 2006