On the 6th April 2006 major changes were introduced to the structure of UK Pension schemes. These changes heralded probably the most radical overhaul of the UKs’ Pension tax regime. The new simplified regime is largely a replacement of the past pension framework as opposed to the addition of another layer of legislation. Many changes were introduced, some of the main ones are as follows:
Introduction of a Lifetime Allowance
Each member of a pension scheme has a maximum permitted tax-exempt fund at retirement. This lifetime allowance is currently set at £1.8million in 2010/2011 tax year.
Contributions & The Annual Allowance
There is now an annual pension input allowance, (known as the Annual Allowance) set at £255,000 for all pension schemes. An individual can now contribute up to 100% of their earnings or £3,600 whichever is the greater.
Pension Commencement Lump Sum (Tax free Cash)
The maximum pension commencement lump sum (Tax Free Cash) from any pension arrangement is 25% of the value of the pension rights.
However in some cases prior to pensions simplification, members may have built up the rights to a lump sum greater than 25%. If this is the case, these members can apply to protect these benefits. This is a complex area of pensions advice and consultation with an advisor would be highly recommended.
The concept of a normal retirement age is less definite than it was in the past, members of pension schemes can choose (within certain age ranges) when to take their benefits, making the process of retiring more flexible. The minimum age for drawing benefits will rise from 50 to 55 years with effect from 6th April 2010, (subject to some transitional rules)
The maximum lump sum death benefit is simply equal to the lifetime allowance, so this is currently £1.8 million.
(There are transitional provisions made in respect to some of these key areas of planning and in respect to overfunding the goverment have introduced some tax charges.)
Drawing your Pension
Retirement income is now classified under 4 main headings:
- Scheme Pensions – typically, drawing your income directly from your employers occupational pension scheme.
- Lifetime annuities – taking your income as an annuity. Commonly associated with drawing income from Personal pension / Stakeholder pension type schemes
- Unsecured pension – Pension Fund Withdrawal / Income Drawdown and Phased retirement
- Alternatively Secured Pensions – A variation of Income Drawdown, that is only available from age 75
These are some of the headline changes to Pension legislation. The new rules are quite detailed and will effect different people in different ways, so to see how the new changes may have affected you please contact us.