The pension reforms
July 2010
A welcome change to what you can put in, and take out of your pension.
On 6 April 2006 new pensions legislation came into effect, changing the way we can save into our pension funds and how they are paid out. The aim of the reforms is to make saving for a pension much less complicated and more flexible, thereby encouraging more people to start saving for retirement.
Here are the main changes and how they may affect your plans:
Changes to the age of retirement
One major change is to the age of retirement. Between 2010 and 2020, the minimum age at which women will be able to claim their State Pension will rise gradually from 60 to 65, with men still able to retire at 65. The minimum age at which you can claim your personal or occupational pension rose on 6 April 2010 from 50 to 55. The longer we live the more we need to save to keep us going in retirement.
The previous Labour government had plans to gradually increase the State Pension age for both men and women, which would be introduced over two years every decade. The changes would mean that:
- State Pension age would increase from 65 to 66 from April 2024 - 2026
- State Pension age would increase from 66 to 67 from April 2034 - 2036
- State Pension age would increase from 67 to 68 from April 2044 - 2046
However the new coalition government has announced plans to review when the State Pension age will rise to 66.
You can find out about your State Pension entitlement by going to the Directgov website.
The new rules also allow you to continue working after you have begun drawing your personal or occupational pension, unlike previously when you were required to leave your job in order to claim the company pension.
Changes to how much you can save
You can now contribute to as many different pension funds as you like, regardless of how much you earn. Unless you are very wealthy, there is virtually no upper limit on the amount of earnings that you can put into your pensions, or how much you contribute to your pension in a given tax year.
The ceiling currently stands at £255,000 a year (2010/11) for contributions towards a total pension pot of £1.8 million. Above this level additional contributions will be taxed.
Since you can now put far more into your pension than you used to, the question is how much can you afford?
Changes in tax rules
If you could afford it, it’s more than likely you could invest up to 100% of your income, up to £255,000 a year (2010/11), and it will remain at this level until 2016.
The lifetime allowance for contributions is now £1.8 million (2010/11) and above this level, additional contributions will be taxed.
There are changes in the tax rules too for higher earners when it comes to pension contributions and tax relief.
From April 2011, those earning more than £150,000 a year will have their pension tax relief restricted. Tax relief will not be available as it was – that is, at the highest marginal rate of income tax paid - but instead it will be gradually tapered to just 20% - the same level as a basic rate taxpayer gets.
In addition, since 9 December 2009, the same annual allowance has applied if your income is £130,000 or more, except that it applies to changes you make to the amount you usually save towards your pension on or after 9 December 2009.
Changes to how you take your pension
Pensions are now more flexible too. You can take 25% of your pension fund as a tax-free lump sum. This is a real benefit for people making additional voluntary contributions into occupational pension schemes, where lump sums could previously not be taken. You need to check though, as rules on lump sums vary between schemes.
For small pension funds totalling £18,000 or less, in some circumstances the whole fund can be taken as a lump sum, with 25% tax-free. Again, the rules are complicated and you will need to take advice.
You can find a financial adviser here.
What’s new in annuities?
You no longer have to buy an annuity with your pension fund. Now you can draw an income directly from your fund. If you are under 75, this will take the form of an unsecured pension. Over 75, you can opt for an Alternatively Secured Pension (ASP) instead of buying an annuity. Remember, if you don’t buy an annuity, your pension will become part of your estate and will be subject to Inheritance Tax when you die.
Annuities have come a long way in the past few years and there are many types available from impaired life annuities for those with health conditions through to with profit annuities where income levels depend on performance.
For more information about pensions and annuities options why not visit the government’s own websites:
