UK - Hewitt Associates has urged people to carry out a thorough review of their pension savings before the end of the tax year or face paying higher taxes in 2006.
The government is replacing the existing eight pension tax regimes with a single new regime that will come into force on April 6, 2006. Under the new regime, a “lifetime allowance” is applied to the capital value of each person’s pension savings of £1.5m (equivalent to a pension income of £75,000 per annum). Pension benefits above the allowance will be subject to 55% tax.
Tony Baily, pensions consultant at Hewitt, said: “On the face of it, the lifetime allowance of £1.5m sounds like a big number and has possibly resulted in some complacency. However, it’s not just the big earners that will be affected, it’s also those on middle incomes.”
He explained: “For example, our calculations show that even individuals with annual earnings £40,000 or 50,000 at the age of thirty may get caught by the changes too.”
Under transitional arrangements announced by the government, individuals can shield their existing pensions from higher tax but they may need to make a decision before April 2006.
Baily added: “These transitional arrangements offer an opportunity for some individuals to maximise their pension savings before April 2006. But with just two tax year deadlines before 2006, it is time for these people to act if they intend to maximise their pension savings.”
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