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| Retirement |
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| A-Day pensions reform Are you taking full advantage of the new regime? |
| Are you fully up to speed with the new pensions reform that came into effect on 6 April this year, also known as A-Day?
The Government decided to simplify the pensions regime by scrapping the previous eight different sets of rules that governed pension contributions and retirement options and replacing them with a single set of rules for all pension plans. For most people the overall impact of these reforms has been positive. There are now fewer restrictions on how much you can contribute to your pension funds and more options to choose from when you do retire. Perhaps the most significant change to pension rules as far as most workers are concerned is that everyone is now permitted to contribute up to £215,000 a year, or 100 per cent of their salary, whichever is the lower figure, to their pension fund tax-free. This annual allowance is set to rise by £10,000 a year until it reaches £255,000 in the 2010/11 tax year. For most people, particularly those saving in occupational schemes, this means potentially very significant increases in their annual contributions. Savers in occupational schemes are also permitted to hold other types of pension plan, such as self-invested personal pensions (SIPPs). In addition to the annual allowance, the Government has introduced a lifetime allowance (LTA), which is a cap on the size of the pension fund that you are permitted to build up over the course of your lifetime. In the 2006/07 tax year, the LTA is £1.5m. Any funds in excess of £1.5m will be taxed at 55 per cent. The other significant changes to the pensions regime relate primarily to the way in which we can take our pension when we reach retirement age. The retirement age itself is undergoing changes: the minimum retirement age will rise from 50 to 55 from 6 April, 2010.
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When you retire, you will be permitted to take 25 per cent of your pension fund as a tax-free lump sum. With the rest of your fund you can either purchase an annuity or you can take unsecured pension, until the age of 75.
The limits on how much income you can take if you opt for the unsecured pension have been relaxed: you can take up to 120 per cent of the income you would receive if you purchased an annuity on the open market, instead of only 100 per cent. It is now no longer compulsory to purchase an annuity at 75. You can opt to take an alternatively secured pension (ASP), which permits you to leave your money invested. The restrictions on how much income you can take with the ASP are much more stringent than those on the unsecured pension, however. You are permitted to take no more than 70 per cent of the sum you would receive from an annuity. But there is no minimum income withdrawal requirement, so interest can be left to roll up tax-free and can be used to pay a dependant’s pension, or possibly transferred to another family member’s pension, after you die. Another key change affects those who have very small or ‘trivial’ pensions. If your pension fund is worth less than 1 per cent of the LTA – £15,000 in the 2006/07 tax year – you are not required to purchase an annuity. Instead, you are now allowed to take a quarter of your fund as tax-free cash, with the rest taxed at the basic rate. Although the Government had originally proposed to allow savers to hold alternative assets – such as residential property, art and antiques – within SIPPs, this has been scrapped. |
If you would like to find out more, please email or contact us for further information. |
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