The Government is replacing the existing eight different pension
regimes with one set of rules. These changes will introduce much needed
flexibility and will benefit most people.
The changes will come in to effect in April 2006, when everyone will
have a lifetime limit of £1.5 million for their pension fund. Funds
in excess of this will be subject to additional tax.
This is our current understanding of the rules and these may change
before April 2006
Overview
At present pensions are governed by complex rules and many individuals
are have been turned off pensions because they do not understand and appreciate
the benefits they provide.
Pension Simplification will do exactly what its name suggests and make the
rules simpler and provide more flexibility. Therefor we expect many more people
to take advantage of the benefits they provide.
Lifetime Limit
From 2006, everybody will be given a Lifetime Allowance of £ 1.5
million. This means that pension funds up this limit will be exempt from
tax when pension benefits are taken.
However funds in excess of the lifetime allowance will be taxed (lifetime
allowance charge). In most cases this tax charge will be 55%.
The important point to grasp is that there will be no limit to the amount of pension an individual can accumulate, but only funds below the lifetime limit will be exempt from tax.
Protection
An individual who currently (before April 2006) has a pension fund in excess
of £1.5 million (or whose fund may exceed £ 1.5 million in the future) may
apply for special protection.
There are two types of protection. Enhanced Protection and Primary Protection.
Contributions
After 2006 individuals will be able to contribute up to 100% of their earnings,
subject to a maximum of £ 215,000 and obtain tax relief at their marginal
rate.
Contributions in excess of this limit will be taxed at 40%
Retirement Age
The minimum retirement age will increase from 50 to 55 by 2010
Those with existing agreements to retire earlier should be able to keep
the lower retirement age
Tax Free Cash
After 2006, individuals with money purchase schemes will be able to take
a tax free cash sum of 25% of the fund
Members of defined benefit schemes may benefit from a new formula for calculating the maximum tax free cash
Death Benefits
The death benefits will depend on the actual circumstances but in general
terms the death benefits after 2006 will be more advantageous than those
currently available.