The introduction of Pension Simplification legislation on 6 April 2006 (A-Day) brought about the biggest change in pension legislation in a lifetime with the following aims:
– to reduce the complexity of pensions
– to offer simpler and more flexible retirement arrangements
– to encourage saving for the future
Since 6 April 2006, simpler rules have been applied to both personal and occupational schemes. The rules allow most people to pay more into their pension schemes and on more flexible terms than before.
You can now save as much as you want into any pension scheme. The rules for claiming tax relief on your pension contributions are also more flexible, though tax charges will apply if you go above certain allowances.
You can now contribute as much as you like into any number of pension schemes (personal and/or occupational) each year. There is no upper limit to the total amount of pension saving you can build up.
Each year you will receive tax relief on your pension contributions of up to 100 per cent of your UK earnings (salary and other earned income). This is subject to an ‘annual allowance’ above which tax will be charged. However, under changes announced in the 2009 Budget restrictions were introduced from 22 April 2009 for people earning £150,000 or more.
The annual allowance for the tax year starting 6 April 2009 is £245,000 and from 6 April 2010 it will increase to £255,000. Yearly pension savings above this allowance are taxable at 40 per cent, whether made by you and/or your employer. If the annual allowance is exceeded you need to declare the extra pension savings and pay the annual allowance charge through Self-Assessment. The annual allowance charge will not apply in the year you take all your benefits.
The lifetime allowance for the tax year starting 6 April 2009 is £1.75 million and for the tax year starting 6 April 2010 increases to £1.8 million. The value of any pension savings above this allowance will be subject to a lifetime allowance charge. This applies in addition to the usual Income Tax due on pension payments. If you take benefits above your lifetime allowance as a pension, the lifetime allowance charge on the excess amount will be 25 per cent. If you take benefits above your lifetime allowance as a lump sum, the lifetime allowance charge on the excess amount will be 55 per cent.
The 2006 rules introduced a lifetime allowance test. This means that the total value of the benefits built up in your pension fund/s by you and/or your employer will be tested. This includes investment growth. The test will take place when you start drawing your benefits or when you reach age 75. In this case, tax would be payable as if you were drawing an income from the pension. You must become entitled to a lump sum before you reach age 75.
More ways of taking your pension income
There are now four choices:
– take a scheme pension – a secured pension for life paid out of the scheme assets or purchased from an insurance company
– buy an annuity (an investment that provides a regular income for life)
– draw an income directly from your pension fund, as an ‘unsecured pension’ before age 75
– draw an income directly from your pension fund, as an ‘alternatively secured pension’ from age 75
All types of pension schemes are now allowed to pay a tax-free lump sum of up to 25 per cent of the overall value of your benefits. This is provided there is provision in the scheme rules, to an overall maximum of 25 per cent of the lifetime allowance. You are not entitled to a tax-free lump sum once you reach age 75.
If you’re a member of an occupational pension scheme, you no longer have to leave your job to draw your lump sum and a pension. You may also be able to draw all or some of your lump sum and pension while still working full or part-time for the same employer, depending on your pension scheme’s rules.
From 6 April 2010, the minimum age at which you’ll be able to take your company or personal pension increases from 50 to 55.
However, you may still be able to take your pension before age 55 in certain circumstances, for example if you are unable to work due to ill-health.
Between 2010 and 2020 the minimum age at which women will be able to get their State Pension will gradually rise from 60 to 65.
State Pension age will also increase for both men and women from age 65 to 68 between 2024 and 2046.