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Pension Rules from April 2006

From April 2006,  new rules to simplify pensions were introduced. These  apply to both personal and company (occupational) schemes. The new rules will allow most people to pay more into their pension schemes.

Saving more into your pension

The government currently places limits on the amount you can pay into your pension scheme and the amount you can get tax relief on. These limits currently differ for personal and employer provided pensions, but from April 2006 they will be the same for all pensions.

There will be no limit on the amount of pension saving you can build up in a pension scheme, but there will be new limits on the tax relief given on the amount you (and your employer) pay into your pension scheme. The maximum tax relief you will get each year will be 100% of your earnings, but subject to:

  • an Annual Allowance
  • a Lifetime Allowance

Your Annual Allowance

As of April 2006 you’ll be able to pay as much as you like into a pension scheme.
You will have an annual allowance allowing you to receive tax relief on savings into your pension scheme of up to £215,000 a year. This allowance will rise each year until, by 2010, it will be £255,000 per year. This figure will then be reviewed every five years.
The annual allowance applies to the increase in your pension fund and includes savings made by you and your employer. Where your pension savings in any one year exceed the annual allowance you will be taxed at 40 per cent on that excess.
The payments you make into your pension which benefit from tax relief can’t be more than your earnings (your salary and any other earned income) in that year. But if you have few or no earnings you can receive tax relief on up to £3,600 a year.

Your Lifetime Allowance

From April 2006, your lifetime allowance will be £1.5m. This will increase each year until, by 2010, it will be £1.8m. This figure will then be reviewed every five years. Any pension savings above this allowance will be taxed at 25 per cent, or 55 per cent if taken out as a lump sum when you take your benefits.
This allowance applies to the value of the benefits you’ve built up throughout your career – including those you’ve paid for and those provided by an employer.
It includes not only the amounts paid in, but also all the interest or investment growth that has built up.
If your current pension saving is close to, or above, the initial lifetime allowance figure of £1.5m it’s important to seek specialist advice about how you might protect your pension from the lifetime allowance charge. You can also get general advice from The Pensions Advisory Service.
If you’re in a scheme already, it’s a good idea to check what it provides so you can decide whether you with to make additional pension savings.

Added flexibility

The new rules aim to add flexibility to the pension system – you’ll be able to save in more than one scheme, and mix personal and employer provided schemes more freely.
Pension schemes will also be allowed a much wider choice of investments, including residential and leisure property. It’s a good idea to get specialist advice if you’re interested in developing your own pension in this way.
There’ll also be changes in the way you can use your pension fund to provide your pension income. From April 2006 you will be able to take an income from your pension, buy an annuity or take a new option called an Alternatively Secured Pension (ASP).
But remember, pension schemes are subject to individual scheme rules, so it’s a good idea to check with your pension administrator what your scheme allows.

How and when you take your pension

The new rules aim to make pensions more adaptable, so you will have a greater choice about how and when you take your benefits. But remember, the payment of all benefits is subject to individual scheme rules, so it’s a good idea to check with your pension administrator what your scheme allows.
If you’re a member of a company pension scheme, you’ll no longer have to leave your job to draw a pension.
From 2006, you can choose to draw all, or some, of your pension while still working full- or part-time for the same employer depending on your individual scheme rules.

Receiving a lump sum

All pension schemes will be allowed to pay you a tax-free lump sum of up to a quarter of the value of your benefits – with a maximum of 25 per cent of the Lifetime Allowance, depending on the rules of your scheme.

Changes to pension ages

From April 2010, the minimum age at which you’ll be able to take your company or personal pension will increase 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. Your pension administrator will be able to tell you what your scheme allows.
Between 2010 and 2020, if you’re a woman, the minimum age at which you’ll be able to receive your State Pension will gradually rise from 60 to 65.

© Crown copyright information issued by Her Majesty’s Government

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