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Pension Simplification

Since 6th April 2006 more straightforward rules have been applied to both Personal and Company pension schemes. 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:-

Pension Contributions

There is no upper limit to the total amount of pension saving you can build up. You can contribute as much as you like into any number of pension schemes (personal and/or company) each year.

Tax Relief on Pension Contributions

Each year you'll receive tax relief on your pension contributions of up to 100 per cent of your UK earnings (salary and other earned income). This is subject to an 'annual allowance' above which tax will be charged (more below).

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.

Annual Allowance

The annual allowance is the maximum amount of pension saving you can have each year that benefits from tax relief. The lifetime Allowance is currently 1.5 million (2013/2014 tax year)

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 £1.8 million per person (2011/2012 tax year), but will reduce to 1.5 million pounds in April 2012.

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.

Retirement Age

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 from 50 to 55 years on the 6th April 2010.

Death Benefits

The maximum tax free lump sum death benefit is simply equal to the lifetime allowance, so currently this is £1.5 million.

If any part of the lump sum death benefit is above the lifetime allowance this is then subject to a tax charge of 55%

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. Income Drawdown - Pension Fund Withdrawal / Income Drawdown and Phased retirement.

These are some of the headline changes to Pension legislation. The new rules are quite detailed and will affect different people in different ways, so to see how the new changes may have affected you please contact us.