The pension reforms
May 2009
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 is also due to rise too – from the current limit of 50 to 55 by 2010. The longer we live the more we need to save to keep us going in retirement.
You can find out about your state pension entitlement by going to the government’s Pension Service website www.pensions.gov.uk
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 £245,000 a year for contributions towards a total pension pot of £1.75 million – a nice problem to have. 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 £245,000 a year. Above this level additional contributions will be taxed. The upper limit is due to increase by £10,000 to reach £255,000 for the tax year 2010/11.
The new lifetime allowance of £1.75 million will also increase, rising to £1.8 million by 2010. Again, if you go over the top, you will be taxed on the excess.
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 £17,500 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 an independent 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 along 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:
