On the 6th April 2006 (A Day) new rules were introduced which were a major overhaul of the pension system, designed to simplify the pension regime and iron out differences between different types of pension arrangement. As always, new rules are not always that simple!

The rules provide restrictions on how much can be saved for some whilst providing opportunities for others.

Retirement Age
The minimum retirement age for taking pension benefits is presently 50, but this will increase to 55 for those born on or after 6 April 1960. You can of-course carry on working to any age, or start to take your pension benefits once you reach the minimum retirement age and continue to work at the same time. However you must start to draw at least something from your pension no later than your 75th birthday.

Annual Allowance
The main points are...

• The  maximum level of pension contributions that can qualify for tax relief in one year is limited to 100% of your earned income capped at £235,000 for 2008/09. This cap is called the annual allowance and will increase to £255,000 by 2010/11.
• For final salary schemes (also called defined benefit schemes), the annual allowance is calculated by reference to the increase in pension benefits multiplied by a factor of 10:1 and not the actual contributions. So an increase in your accrued annual pension benefits of £10,000 is multiplied by 10 to give an equivalent contribution of £100,000.
• A person with little or no earnings can still contribute up to £3,600 (gross) into a registered pension scheme.
• If tax relief on more than the annual allowance is given, the excess relief is clawed back with a 40% tax charge. However contributions in excess of the annual allowance may be made into a pension scheme without tax relief being given.
• There is no restriction in the annual allowance in the year that retirement benefits are taken.

Lifetime Allowance
The main points are...

• There is a cap on the level of funds in a pension scheme that can escape tax charges when they are used to provide pension benefits. This cap is called the lifetime allowance and is set at £1.65 million for 2008/09, but will increase to £1.8 million by 2010/11.
• The lifetime allowance is only considered when you start to take your pension benefits.  
• Benefits within a final salary scheme will be valued for these purposes using a factor of 20:1. For example, an annual pension of £10,000 equates to a fund of £10,000 x 20 = £200,000 plus whatever tax free cash lump sum is taken.
• If the pension fund exceeds the lifetime allowance, there is a tax charge of 25% of the excess used to provide a pension, or if the excess is used to provide a lump sum the tax charge is 55%.
• There are transitional provisions to provide protection in cases where the pension fund existed at 6 April 2006 which must be applied for by 5 April 2009:
• Primary Protection – if the pension fund already exceeded the lifetime allowance on A Day. The value of the fund at that time becomes your lifetime allowance which is just increased with inflation.
• Enhanced Protection - this is where your fund is below the lifetime allowance on A Day and you are not actively contributing to any pension fund. The lifetime allowance will not apply but no further contributions are permitted after A day.

Scheme Investments
In a U-Turn the chancellor didn't allow SIPPs and SSASs to invest in directly in residential property and some other prohibited assets such as art, fine wine, and antiques. There are significant tax penalties for such investments.

Subject to certain restrictions, the pension scheme can borrow to make investments and transactions between the scheme member and the pension fund are also allowed. There are also restrictions on loans to the sponsoring employer and share purchases in these companies.

Tax-Free Lump Sum
The main points are...

• You can take the tax-free lump sum when you start to draw your pension, or if you become terminally ill.
• The maximum tax-free lump sum payment is 25% of the value the pension fund with an overall restriction of 25% of the lifetime allowance.
• You can take 25% tax-free cash from the whole pension fund including those from additional voluntary contributions and protected rights.
• Transitional rules allow you to still take 25% of the pension fund if that is in excess of 25% of the lifetime allowance, and the fund existed on A day.

Pension Income
There are various ways of paying pension income including...

• Lifetime Annuity - an annuity is purchased to provide an income for life from an insurance company.
• Income Drawdown - the pension income is taken from the assets of the pension scheme and can be varied in any year down to zero to help protect capital for the future.
• Alternatively Secured Pension (ASP) - this is the continuation of income drawdown after age 75 without the purchase of an annuity. There are restrictions on funds invested by ASP's from 6 April 2007 of...
  • A minimum income requirement of 55% of a comparable annual annuity;
  • Maximum income withdrawal of 90% of a comparable annual annuity;
  • An unauthorised payments charge where the ASP fund of a member on death is transferred to the funds of other scheme members who are not dependents.
• Scheme Pensions - pension income is paid directly from the pension fund with income guaranteed by the employer and only suitable for larger schemes.

Death Benefits
The main points are...

• A tax-free cash sum up to the lifetime allowance can be paid on death before pension benefits have started.
• Also, your pension fund can provide dependants' pensions without any test against the lifetime allowance.
• Transitional protection is available for funds already in excess of the lifetime allowance on A Day.

Trivial Pensions
If your total pension benefits are 1% or less of the lifetime allowance which is £16,500 for 2008/09, you can now take these benefits in a lump sum of which 25% can be paid tax free and the balance as income. This has to occur in any twelve month period between the ages of 60 and 75.

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