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Since April 2006, simpler rules have been applied to both personal and company (occupational) schemes. The rules allow most people to pay more into their pension schemes – and on more flexible terms than before.
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.
You can now contribute as much as you like into any number of pension schemes (personal and/or company) each year. There is no upper limit to the total amount of pension saving you can build up.
Each year you will receive tax relief on your pension contributions of up to 100 per cent of your UK earnings (salary and other earned income). This is subject to an 'annual allowance' above which tax will be charged (more below). However, under budget changes announced during 2009 restrictions were introduced from 22 April 2009 for people with incomes of £150,000 or more. From 9 December this restriction applies to people with incomes of £130,000 or more. See more about budget changes in the section 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.
The annual allowance for the tax year starting 6 April 2010 is £255,000. Yearly pension savings above this allowance are taxable at 40 per cent, whether made by you and/or your employer. If the annual allowance is exceeded you 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.
The lifetime allowance for the tax year starting 6 April 2010 is £1.8 million. The value of any pension savings above this allowance will be subject to a lifetime allowance charge. This applies in addition to the usual Income Tax due on pension payments. 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 2006 rules introduced a lifetime allowance test. This means that the total value of the benefits built up in your pension fund/s by you and/or your employer will be tested. This includes investment growth. The 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 must become entitled to a lump sum before you reach age 75.
Under changes announced in the 2009 Budget, from April 2011 the amount of tax relief will reduce if your income is £150,000 or more. Restrictions were introduced from 22 April 2009 to stop people making large additional pension contributions and getting full tax relief ahead of April 2011. The restrictions will apply to you if all of the following apply:
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.
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.
There are now four choices:
All types of pension schemes are now allowed to pay a tax-free lump sum of up to 25 per cent of the overall value of your benefits. This is provided there is provision in the scheme rules, to an overall maximum of 25 per cent of the Lifetime Allowance. You are not entitled to a tax-free lump sum once you reach age 75.
For more information on ways to take your pension, visit the Financial Services Authority (FSA) website.
If you're a member of a company pension scheme, you no longer have to leave your job to draw your lump sum and a pension.
You may also be able to draw all or some of your lump sum and pension while still working full or part-time for the same employer, depending on your pension scheme's rules.
From 6 April 2010, the minimum age at which you are able to take your company or personal pension increased from 50 to 55 for most people.
However, you may still be able to take your pension before age 55 in certain situations. 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 and whether you're covered by one of the other situations.
Today the State Pension age for men is 65. Starting on 6 April 2010, the State Pension age for women began to change from 60 to 65. The State Pension age for both men and women will rise in the future.
The government is reviewing the current timetable for increasing the State Pension age from 65 to 66. No decision has yet been made as to how the timetable will change. Any change will require the approval of Parliament.
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