How the landscape for retirement planning has changed
The government introduced new pension rules, known as ‘pension simplification’, that became effective from 6 April 2006 (A-Day). This completely changed the pension landscape by creating a single universal regime that replaced the previous eight tax regimes.
Savers in occupational and personal pension schemes and employers have all been affected. The new tax rules also changed when and how people could retire, how they could contribute and what their funds could invest in.
Pension simplification introduced two new controls – the pension lifetime allowance and the pension annual allowance. The other main changes allowed all schemes to offer a tax-free cash sum of up to 25 per cent and to allow employees the opportunity to continue working for their employer while taking benefits from their occupational pension scheme. This also included the protected rights portion of a pension, AVC, FSAVC and transfers received from occupational pension schemes.
The value of your investment can go down as well as up and you may not get back the full amount invested
The Lifetime Allowance is the maximum amount of pension savings that can benefit from tax relief and is currently set at £1.75m (2009/10). If you are a member of a registered pension scheme, you will be subject to a lifetime allowance on the total cumulative value of the pension benefits you draw from the scheme, whether you receive them in the form of a lump sum or a pension. The value of the benefits is measured at the time they commence. If you exceed this limit you are subject to a lifetime allowance charge. The rate of charge is 25 per cent if the excess benefits are taken as pension income and 55 per cent if taken as a lump sum.
The annual allowance provides a cap on the total annual amount of tax-relieved contributions, or benefit accrual, that you may contribute into one or more registered pension schemes either for yourself or on behalf of an individual. Savings above this amount are usually subject to an annual allowance charge of 40 per cent, payable by the individual. The current annual allowance is £245,000 (2009/10); however, this is being frozen for the tax years 2011/12 to 2015/16 inclusive, at £255,000.
The minimum pension age is currently 50 years. However, this will increase to 55 from 6 April 2010. From this date, it will not be possible for individuals under the age of 55 to take pension benefits. This will also apply to taking a tax-free lump sum, purchasing an annuity and effecting income drawdown.
If you turn 50 by 5 April 2010, you could take a tax-free lump sum from your personal pension (known as a ‘pension commencement lump sum’ or PCLS) of up to 25 per cent of your fund. After this date, the latest rule change means you’ll have to wait until you’re at least 55.
We understand that life is a process of constant change. That’s why the most important element of any retirement planning strategy should be to protect and enhance your future wealth. Our objectives are simple – to increase the asset value and minimise the tax liabilities of our clients. If you would like to discuss your particular requirements, please contact us.