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 was 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 £1.25 million in (2014/2015 tax year)
Contributions & The Annual Allowance
There is an annual pension input allowance, (known as the Annual Allowance) set at £40,000 (2014/2015 tax year), 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 or the available lifetime allowance, whichever is the lower.
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 rose to 55 years with affect from 6th April 2010. The different options at retirement are featured below and covered in more detail on the Annities, Pension Fund Withdrawal and Phased Retirement pages.
The maximum lump sum death benefit is simply equal to the lifetime allowance, so this is currently £1.25 million.
(There are transitional provisions made in respect to some of these key areas of planning and in respect to overfunding the government have introduced some tax charges.)
Drawing your pension
Retirement income is now classified under 3 main headings:-
1) Scheme Pensions - typically, drawing your income directly from your employers occupational pension scheme.
2) Lifetime annuities - taking your income as an annuity. Commonly associated with drawing income from Personal pension / Stakeholder pension type schemes
3) Capped drawdown - Pension Fund Withdrawal / Income Drawdown and Phased retirement
Above is an overview of some of the headline changes to Pension legislation over recent years. More current are the changes that were introduced by the Finance Act effective from 6 April 2011, changing the amount that can be drawn from an income drawdown plan. The requirement to purchase an annuity at the age of 75 has been removed, and an individual will be able to continue in drawdown for their lifetime. This means it is possible to defer purchasing a pension annuity until the member is older or in poor health when annuity rates and the pension fund value could be higher.
The new rules are quite detailed and will effect different people in different ways, so to obtain further information or see how the new changes have affected you please contact us.
A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND ON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES, AND TAX LEGISLATION