Biggest Overhaul of pensions for 50 years

A-Day Simplifications

Prior to A-Day the Government placed limits on the amount that could be paid into a pension scheme. However, from A-Day there are no limits on contributions. In addition, individuals will be able to get tax relief on pension contributions of up to 100 per cent of their taxable earnings (including salary, bonuses and benefits). Contributions will be subject to some control – an Annual Allowance, and a Lifetime Allowance.

The Annual Allowance is the amount of money that can be contributed to your pension each year that benefits from tax relief. This is 100 per cent of earnings, subject to an initial cap of £215,000 for the current tax year 2006/07.

This will rise each year until it reaches £255,000 in 2010 and will thereafter be reviewed every five years. Where an individual’s contributions (plus any contributions from their employer) exceed the annual allowance, there will be a tax charge at 40 per cent on the excess.

The Lifetime Allowance relates to the total value of the benefits built up in an individual’s pension fund/s including contributions made by an employer and including investment growth. This has been set at £1.5 million for the current tax year 2006/07. This will rise each year until it reaches £1.8 million in 2010 and will thereafter be reviewed every five years.

If, when an individual starts taking their benefits, the value of pensions savings exceeds the Lifetime Allowance, there will be a Lifetime Allowance charge on the excess. This charge is set at 25 per cent if the benefits are taken in the form of pension income and at 55 per cent if taken as a cash lump sum. This will apply in addition to the usual income tax due on the pension payments.

Under the new rules there is now greater flexibility for individuals in terms of how and when benefits can be taken. One key feature of the new regime is a more generous tax-free lump sum – as pension schemes are permitted to pay individuals a tax-free lump sum of up to 25 per cent of the value of their pension fund (to a maximum of 25 per cent of the lifetime allowance).

Under pre A-Day laws, individuals had limited options on how to take their pension. Since A-Day individuals now have increased choices, subject always to the rules of their particular scheme.

Individuals will be able to get tax relief on pension contributions of up to 100 per cent of their taxable earnings (including salary, bonuses, benefits etc). Contributions will be subject to some control – an Annual Allowance, and a Lifetime Allowance.

Employers should note that members of occupational pension schemes will no longer need to leave their jobs in order to draw a pension. A more flexible retirement will be far easier as individuals are able to draw pension benefits while working for their employer on a full time or part time basis (again subject always to the rules of the particular scheme).

There are still limits as to when individuals can take benefits in terms of their age; however, early retirement at 50 is still permissible. This will increase to 55 in 2010, though individuals may still be able to take their pension early for ill-health reasons if the particular scheme allows it.

Another effect of the new rules is that individuals are able to join more than one scheme, so they can join both an occupational scheme and contribute to a personal pension scheme. Employers do not therefore need to worry about what other pension provision an individual has.

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