Single tax regime
The introduction of the new legislation in April 2006 has aimed to simplify the current rules for pensions ensuring that all pensions are subject to the same tax treatment, no matter what type of scheme it is or when it started.
Introduction of new allowances
There are no longer limits on pension benefits and contributions. Instead, everyone has 'allowances' which may be exceeded but any amount over the allowance is taxed. Since A-Day, you are now able to contribute more to your pension and still get tax relief.
Annual Allowance
The amount of money that you can put in your pension each year is now subject to new 'Annual Allowance' rules. Contributions of up to £3,600 in any tax year or 100 per cent of yearly earnings up to the Annual Allowance level get tax relief. The Annual Allowance for 2006/7 is £215,000, rising by £10,000 per annum to £255,000 in the 2010/11 tax year. If you contribute more than the Annual Allowance in a tax year, these are taxed at 40 per cent.
If you are a member of a final salary scheme, any increase in the value of your pension over the course of the tax year is also be subject to Annual Allowance rules.
Lifetime Allowance
A 'Lifetime Allowance' replaces all current benefit limits. When you draw your pension, the value of all your pension arrangements are totalled and tested against the Lifetime Allowance. All amounts above the Lifetime Allowance are taxed at 25 per cent if taken as pension income (which is then subject to Income Tax) or taxed at 55 per cent if taken as cash. In 2006/7 the allowance has been set at £1.5 million, rising to £1.8 million in 2010/11.
If your pension has been provided by a final salary scheme, the value of the pension (and any tax-free cash) is also tested against the Lifetime Allowance. Any amount above the Lifetime Allowance is taxed at 55 per cent.
Tax-free lump sum
The amount of benefits that can be taken as a tax-free cash lump sum is now limited to 25 per cent of the pension fund subject to a maximum of 25 per cent of the Lifetime Allowance. In the 2006/7 tax year, up to £375,000 can be taken as a tax-free lump sum (25 per cent of £1.5 million).
Since A-Day, the tax-free allowance is 25 per cent, irrespective of your current pension arrangements. It is now also possible to withdraw a tax-free lump sum from some pension arrangements, such as AVCs and 'Protected Rights' funds.
Retirement age
The minimum age at which you can start taking your private or company pension will increase from 50 to 55 on 6 April 2010. This means anyone born after 5 April 1960 will not be able to draw a pension until their 55th birthday at the earliest (unless they are in a 'special' occupation that allows this).
Pensions while working
Members of occupational pension schemes no longer have to retire from their employment to draw a pension, so benefits can be taken while they are still working with the same employer.
Retirement options
The previous legislation stated that you must buy an annuity at 75 if you hadn't already used your fund for this purpose. An annuity paid a guaranteed income until your death and continued to pay funds to a nominated spouse or dependant, but you couldn't pass on any remaining funds after your death or the passing away of your nominated spouse or dependant.
Since A-Day, the number of options for drawing a pension have greatly increased. For example, the introduction of the Alternatively Secured Pension allows you to defer annuity purchase beyond the age of 75. The Alternatively Secured Pension, operating as a form of income drawdown, continues indefinitely.
You can also include other relatives as members of your 'own' pension scheme. If you are using an Alternatively Secured Pension, you can transfer any residual funds after the death of you and your spouse or dependant, so that you will be able to pass on unused pension funds to another generation.
For more information on the new legislation, visit the Financial Services Authority's website at www.fsa.gov.uk/consumer/pensions.
1 September, 2006