The UK government is to introduce measures in April 2006 for the simplification of the taxation of pensions. These measures will have implications for professional sports people in the UK because one of the measures proposed is the abolition of special rules for some sports professionals who currently benefit from very early minimum retirement ages.
The government’s measures were first outlined in a consultative document published on 17 December 2002, in which the government proposed replacing the eight existing regimes with a “single set of rules which will apply to saving in all kinds of pension schemes and a single set of simple rules about how pension savings are turned into benefits”. One of the main proposals was to replace the current limits on annual pension contributions and benefits with a single lifetime limit of ?1.4 million on the amount of pension saving that can attract favourable tax treatment.
Following a consultation exercise, a second document was published by the government on 20 December 2003. In his Budget speech on 17 March 2004, Chancellor Gordon Brown announced that the government will proceed with the proposals set out in the December 2003 document (subject to various minor changes), which will take effect from 6 April 2006. The lifetime limit will initially be set at ?1.5 million.
One measure that will particularly affect professional sports people is the proposed increase in the minimum retirement age from 50 to 55, which will be introduced by 2010. This will apply even to those professional sports people whose retirement age for the purposes of their personal pension arrangements is currently lower than 50.
In the current regime, a number of sports professionals may take their benefits from their personal pension arrangements from an early age:
? downhill skiers have a retirement age of 30;
? athletes, badminton players, boxers, cyclists, footballers, ice hockey players, national hunt jockeys, rugby league and rugby union players, squash players, table tennis players, tennis players and wrestlers have a retirement age of 35;
? cricketers, divers, golfers, motor cycle racers, motor racing drivers, snooker/billiards players and speedway riders have a retirement age of 40.
These retirement ages apply only to personal pension arrangements; as far as occupational pension schemes are concerned (which are unlikely to be of relevance to many sports professionals), the adoption of an earlier retirement age for such employees would currently require the specific agreement of the Inland Revenue.
Under the new measures, these retirement ages will be abolished and replaced with the new minimum retirement age of 55. However, those sports professionals who are already at 6 April 2006 in pension schemes with a low retirement age will be allowed to keep their existing rights to take benefits early, but subject to two conditions:
(i) the pension will be tested against a reduced lifetime allowance; and
(ii) the full pension must be vested.
A reduction of 2.5% will be applied to the lifetime allowance for each year before 55 that the pension is taken. For example, a pension taken at age 35 would reduce the lifetime allowance of that individual by 50%. The pension fund would therefore be valued against 50% of the prevailing lifetime allowance (?750,000 using 2006 figures). 50% of the lifetime allowance would remain unused and could be carried forward for use in determining the amount of any further tax-privileged savings that could be built up.