A Summary of the New Rules

On 6 April 2006, new rules came into effect around how pensions are taxed, offering simpler and more flexible retirement arrangements. This is what you need to know:

The many existing sets of rules governing the taxation of pensions were replaced with a single, universal regime. For the first time, everyone will be able to save in more than one pension scheme at the same time.

There is no limit on the amount of money you can save in a pension scheme or the number of pension schemes you can save in - although there are some limits on the amount of tax relief you can get.

Tax Relief on Pension Contributions

The Chancellor has announced that, starting from 6 April 2011, tax relief on pension contributions will be restricted to basic rate for individuals with an annual income of £150,000 or higher. The relief will be tapered down until it is 20%.

In anticipation of this change, there will be special rules which will apply from Budget Day (22 April 2009) to prevent people from making large additional contributions to their pensions before then in order to benefit from higher rates of tax relief while it is still available.

These changes do not affect the vast majority of individuals. They affect only those who have a total annual income of £150,000 or higher in the current tax year or in either of the preceding two tax years.

More information is in Budget Note 47 and in the guidance notes.

There is an annual allowance of £245k in 2009-010 (rising to £255k by 2010-11). If in a tax year your annual pension savings are greater than this, you may be liable to a tax charge. (As announced in the Chancellors of the Exchequer speech on 24 November 2008 as from 6 April 2011 there will be no allowable increases in The Annual Allowance and Lifetime Allowance * until 6th April 2016 at the earliest).

Even if you are not a taxpayer you can still get tax relief on pension contributions. You can put in up to £2,880 in any one tax year and the government will top this up with another £720 - giving you total pension savings with tax relief of £3,600 per year.

The new rules introduce flexible retirement, allowing people in occupational pension schemes to continue working while drawing their pension, where the scheme rules allow it. If your scheme rules allow, you can take up to 25 per cent of your pension fund as a tax free lump sum.

If your pension pot is more than the ‘Lifetime Allowance’ when you come to take your pension you may be subject to a tax charge at that time. But this will only apply if your total pension savings are in excess of £1.65 million from 6 April 2008 (rising to £1.8m by 2010-11*).

The rules on when you can take your pension will change. From 6 April 2010 you will not be able to take a pension before you are 55. There are a couple of exceptions: you will still be able to retire early due to poor health, and if you have the right to retire before 50 at 6 April 2006, that right may be protected.

A full list of pension scheme rates and allowances are available.

Pension drawdown

Provisions introduced in the Finance Act 1995 allowed members of personal pensions to opt for withdrawals from their pension fund, known as pension drawdown, rather than acquiring a compulsory purchase annuity or pension annuity with the pension remaining invested in an insurance company fund. This allows the member to have more control over their pension, but must still purchase an annuity at the age of 75.

Open Market Option (OMO)

This maybe relevant in view of the lack clarity that assurance companies provide their clients.

When you start to take your pension there is no requirement which stipulates that you should stick to the pension plan provider with whom you have been saving. Indeed it may well be in your interests not to do so.

Put another way, you may save through a personal pension for many years but when you reach retirement you can shop around for the best annuity rate.

All personal pension plans include an Open Market Option. This is a ‘get-out’ clause which gives you the right to transfer your pension funds to a different plan provider. To put it another way, it means you can and should shop around for the best annuity deal for your money - remember it is your money!

You can access the Department for Work and Pensions website for further information.