Pension Reform Has Changed The Retirement Landscape

Simplified set of rules ends the previous tax frameworks for pensions

Duncan Brown FCII
Director, MDM Associates Limited
Independent Financial Advisers based in Ripley, Surrey.

You can find the following discussion, amongst others, in our latest newsletter.

From 6 April 2006, also called ‘A-Day’ or ‘pensions simplification’, life changed for retirement savers as the government brought in a new simplified set of rules, effectively bringing to an end the eight previous tax frameworks for pensions.

All pension policyholders are now able to take up to 25 per cent of the value of their fund as a taxfree lump sum when they come to take benefits. This new rule has created a level playing field between different pensions.

Another rule introduced is that you and your employer are now able to pay up to one annual allowance into your pension. During the current tax year (2008/09), this is capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions.

A further move designed to encourage us to save more is the greater ease with which people can now save into a number of different pensions at the same time under the new rules. As well as the annual allowance, there is also a limit on your entire pension savings, including any private pensions, occupational pensions and freestanding additional voluntary contributions.

In this current tax year, this amount is £1.65m. If you exceed £1.65m, you will be subject to the new lifetime allowance charge, or recovery tax, which will be charged at up to 55 per cent on any excess. A pension fund of more than £1.65m might sound like the preserve of the very rich, but it is likely that more individuals will be in danger of breaching the lifetime limit than they realise.

If you are close to or have already exceeded the £1.65m threshold, please contact us to discuss the options available to you.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.