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Sunday, 30 October 2011

Pension rules from April 2006

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.

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 allowances.

Pension contribution limits

You can 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.

Tax relief on pension contributions

Each year you’ll 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).

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 pensions savings will be taxed

The annual allowance is the maximum amount of pension saving you can have each year that benefits from tax relief. The annual allowance has reduced from £255,000 in the 2010-11 tax year to £50,000 for the 2011-12 tax year.

If the pension savings made by you and/or your employer are more than the annual allowance, you'll be charged an annual allowance tax charge. However if you haven't used all of your annual allowance in the last three tax years you may not have to pay this charge.

The amount in excess of the annual allowance will be added to the rest of your annual taxable income. Your tax charge rate will be the rate that is appropriate to the total amount of your excess pension savings plus other taxable income. You'll need to complete a self assessment tax return to pay this tax charge. Follow the link to 'Income Tax - the basics' to find the tax rates that apply to income and savings.

The amount of your pension saving is measured over a ‘pension input period’.  Pension input periods don't necessarily cover the same period as a tax year. Because of the reduction in the annual allowance between the 2010-11 and 2011-12 tax years there are transitional rules to deal with these situations. Follow the 'Annual allowance guidance' link below to find out more.

'Lifetime allowance' above which a tax charge will apply

Lifetime allowance is the maximum amount of pension and/or lump sum that you can get from your registered pension schemes that benefit from tax relief. When you start drawing benefits, or when you reach age 75, the value of your benefits will be tested against the lifetime allowance.

The lifetime allowance for the tax year starting 6 April 2011 is £1.8 million.

There is no limit on the amount of benefits that your pension scheme can pay you. However if your pension scheme gives you benefits that total more than your lifetime allowance you'll pay a tax charge. This will be based on the difference between your lifetime allowance and your pension benefits. For example, if you start taking your pension during the 2011-12 tax year and your pension benefits total £2 million you'll pay tax on £200,000. This is the difference between the current lifetime allowance and your pension benefits.

This charge 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.

For the tax year starting 6 April 2012 the lifetime allowance will be reduced to £1.5 million. You can apply for protection if you think your pension and lump sum may exceed the lifetime allowance rate when you take your benefits. You'll need to apply before 6 April 2012. Follow the link below to 'Lifetime allowance - what is changing' to find out more.

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, 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 three choices:

  • take a scheme pension - a secured pension for life paid out of the scheme assets or purchased from an insurance company
  • buy an annuity (an investment that provides a regular income for life)
  • draw an income directly from your pension fund, as an 'drawdown pension'

A more generous tax-free lump sum

All types of pensions can now pay a tax-free lump sum of up to 25 per cent of the overall value of your benefits. This is so long as there is provision in the scheme rules. This lump sum cannot exceed 25 percent of the lifetime allowance limit.

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 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 for the same employer. This will depend on your pension scheme's rules.

Changes to company and personal pension ages

From 6 April 2010, the minimum age at which you could 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.

Changes to State Pension age

The age you receive your State Pension could be changing. To find out if you are affected, see 'Calculating your State Pension age'.

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