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Thursday, 4 December 2008

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Money, tax and benefits

Pension rules from April 2006

Since April 2006, simpler rules have been applied to both personal and company (occupational) schemes. The new rules allow most people to pay more into their pension schemes – and on more flexible terms.

Saving more into your pension

You can now save as much as you want into any pension scheme. The rules for claiming tax relief on your pension contributions are also more flexible, though tax charges will apply if you go above certain new allowances.

Abolition of pension contribution limits

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

Tax relief on pension contributions

each year you will receive tax relief on your pension contributions up to 100 per cent of your earnings (salary and other earned income) subject to an 'annual allowance' above which tax will be charged (more below)
if you have little or no earnings and are in a 'relief at source' scheme, you will still get tax relief; for every £80 you contribute in a tax year, the government will contribute a further £20 until the total value of contributions reaches £3,600 for the year

Annual allowance above which contributions will be taxed

yearly pension savings above a new 'annual allowance' taxable at 40 per cent, whether made by you and/or your employer
the annual allowance for the tax year starting 6 April 2006 will be £215,000 and will rise each year until it reaches £255,000 in 2010; thereafter the amount will be reviewed every five years
if the annual allowance is exceeded you'll need to declare the extra pension savings and pay the annual allowance charge through Self-Assessment
the annual allowance charge will not apply in the year you take all your benefits

'Lifetime allowance' above which a tax charge will apply

you will now have a 'lifetime allowance' against which the total value of the benefits built up in your pension fund/s by you and/or your employer (including investment growth) will be tested
the value of any pensions savings above the lifetime allowance will be subject to a 'lifetime allowance charge'; this will apply in addition to the usual Income Tax due on pension payments
the lifetime allowance for the tax year starting 6 April 2006 will be £1.5 million and will rise each year until it reaches £1.8 million in 2010; thereafter it will be reviewed every five years
if you take benefits above your lifetime allowance as a pension, the lifetime allowance charge on the excess amount will be 25 per cent
if you take benefits above your lifetime allowance as a lump sum, the lifetime allowance charge on the excess amount will be 55 per cent
the lifetime allowance 'test' will take place when you start drawing your benefits or when you reach age 75 (in this case tax would be payable as if you were drawing an income from the pension; you can't take a lump sum once you reach age 75)

If your pension is close to, or above, the initial lifetime allowance figure it's important to seek specialist advice about how you might protect your pension from the lifetime allowance charge. Protection can be obtained up to 5 April 2009. You can also get general advice from The Pensions Advisory Service on 0845 601 2923 (open 9.00 am to 5.00 pm Monday to Friday), or you can speak to a pensions adviser.

More flexible pension scheme investments

Since April 2006 certain pension schemes are allowed a wider choice of investments, subject to certain rules. To find out more, speak to a pensions adviser.

More choices for how and when you take your pension

There is now more choice for how and when benefits can be taken - as described below. However, bear in mind that pension schemes are subject to individual rules, so you'll need to check with your pension administrator what your particular scheme allows.

More ways of taking your pension income

There are now four choices:

take a scheme pension - a secured pension for life paid out of the scheme assets
buy an annuity (an investment that provides a regular income for life)
draw an income directly from your pension fund, as an 'unsecured pension' before age 75
draw an income directly from your pension fund, as an 'alternatively secured pension' from age 75

A more generous tax-free lump sum

All types of pension schemes are now allowed to pay a tax-free lump sum of up to 25 per cent of the value of your benefits, provided there is provision in the scheme rules, to an overall maximum of 25 per cent of the Lifetime Allowance. Tax-free lump sums are not available once you reach age 75.

For more information on ways to take your pension, visit the Financial Services Authority (FSA) website.

Working and drawing your company pension

If you're a member of a company pension scheme, you no longer have to leave your job to draw a pension.

You may also be able to draw all or some of your pension while still working full- or part-time for the same employer, depending on your pension scheme's rules.

Changes to pension ages

By April 2010, the minimum age at which you'll be able to take your company or personal pension will have increased from 50 to 55.

However, you may still be able to take your pension before age 55 in certain circumstances, for example if you are unable to work due to ill-health. Your pension administrator will be able to tell you what your scheme allows.

Between 2010 and 2020 the minimum age at which women will be able to their State Pension will gradually rise from 60 to 65.