Pension Simplification

On the 6th April 2006 major changes were introduced to the structure of UK Pension schemes. These changes heralded probably the most radical overhaul of the UKs' Pension tax regime. The new simplified regime is largely a replacement of the past pension framework as opposed to the addition of another layer of legislation. Many changes were introduced, some of the main ones are as follows:-

Introduction of a Lifetime allowance

Each member of a pension scheme has a maximum permitted tax-exempt fund at retirement. This lifetime allowance is currently set at £1.5million in (2012/2013 tax year)

Contributions & The Annual Allowance

There is an annual pension input allowance, (known as the Annual Allowance) set at £50,000 (2012/2013 tax year), for all pension schemes. An individual can now contribute up to 100% of their earnings or £3,600 whichever is the greater.

Carry Forward

Carry forward allows unused annual allowance from pension input periods ending in the three previous tax years to be carried forward and added to the annual allowance for the current pension input period.

It applies to the pension input period that ends in the 2011/12 tax year and all subsequent pension input periods. It should help reduce the number of people, who, because of one off spikes in their pension savings and the reduction in the annual allowance, would otherwise be subject to the annual allowance charge.

Pension Commencement Lump Sum (Tax free Cash)

The maximum pension commencement lump sum (Tax Free Cash) from any pension arrangement is 25% of the value of the pension rights.

However in some cases prior to pensions simplification, members may have built up the rights to a lump sum greater than 25%. If this is the case, these members can apply to protect these benefits. This is a complex area of pensions advice and consultation with an advisor would be highly recommended.

Retirement Age

The concept of a normal retirement age is less definite than it was in the past, members of pension schemes can choose (within certain age ranges) when to take their benefits, making the process of retiring more flexible. The minimum age for drawing benefits rose to 55 years with effect from 6th April 2010, (subject to some transitional rules)

Death Benefits

The maximum lump sum death benefit is simply equal to the lifetime allowance, so this is currently £1.5 million.

(There are transitional provisions made in respect to some of these key areas of planning and in respect to overfunding the government have introduced some tax charges.)