6 April 2006  Will See a Revolution in Pensions

Time to get ready

6 April 2006 is A-Day. It will herald the introduction of dramatic changes to the way in which pensions operate in the UK. It’s the most radical overhaul in decades, and it’s going to have a profound effect on the way everyone plans for the future.

A revolution in pensions

Is A-Day going to affect you?

You may be wondering whether A-Day will have an impact on you. If you answer yes to any of the following questions, you’re more than likely to be affected and you will need to know more.

• Are you thinking of drawing your pension before you’re 55?
• Does your current pension plan entitle you to more than 25% tax-free cash?
• Are you likely to have a pension fund in excess of £1.5 million?

Greater opportunities for tax-efficient savings

One simplified set of tax rules

Currently, pension schemes can operate under any one of no less than eight tax regimes. But after A-Day the picture will be a lot simpler, with the eight tax regimes being replaced with just one set of tax rules covering all pension plans.

At the moment you are limited to the number of pension schemes you can join. A-Day will open the gates and give you the power to join any type and number of pension schemes you want.

An end to contribution limits

One of the most dramatic developments to emerge out of A-Day will be the fact that the current limits on pension contributions will be swept away and replaced with a more flexible system of annual allowances.

The new annual allowance for the tax year 2006/2007 will be set at £215,000. This will increase each year, reaching £255,000 by tax year 2010/2011 and will be reviewed each year thereafter.

Tax relief will be given on personal contributions up to £3,600 or 100% of your earnings (whichever is the higher figure) at the basic rate of tax. Higher rate taxpayers will be able to claim further tax relief.

So, for the vast majority of people, they will be able to pay as much as they want into their pension and still benefit from tax relief.

New lifetime allowances

The Government will also be setting a new lifetime allowance. When benefits are taken, if the combined value of pension benefits exceed this allowance, they may be subject to tax. This lifetime allowance will be set at £1.5 million for 2006/2007, rising to £1.8 million by 2010/2011.

Tax-free cash

The A-Day change means that when you start taking your pension benefits, the maximum you will be able to take tax-free as a cash lump sum is up to 25% of your fund or 25% of the lifetime allowance, whichever is the smaller.

If you are entitled to more than 25% tax-free cash from a company pension scheme, this is automatically protected while you remain in the scheme. However, the merits of remaining in that particular scheme should be assessed pre A-Day, as this protection will be lost if you transfer out of the scheme after A-Day, and your tax-free cash could be reduced.

Choose what’s right for you

A wider choice of retirement options at A-Day

After A-Day you will be under no obligation to buy an annuity at 75. Instead, you will have the freedom to take an Alternatively Secured Pension. This will allow you to leave your fund invested and, based on current government actuarial tables, withdraw an income for an indefinite period. Under very strict rules you will be able to pass on any unused pension after your death.

If you are under 75 and opt for income withdrawal, the rules governing income will change on A-Day. There will be no minimum income that must be taken and the maximum allowed will be broadly equivalent to 120% of the income you would get from an annuity based on current Government actuarial figures.

An increase in the pension age

On 6 April 2010, the minimum age at which you will be able to draw a pension will increase from 50 to 55.

Pension plans with ‘protected rights’

At present some people have protected rights benefits because they are, or were at some point, contracted out of the state second pension (formerly known as SERPS). If your pension falls into this category, A-Day will signify three changes that you need to be aware of:

1. When you start drawing your pension benefits, you will have the option of taking tax-free cash up to 25% of your total fund, or 25% of the standard lifetime allowance – whichever is the smaller amount.
2. From 6 April 2006 you will be able to draw benefits from the age of 50 before 2010, and 55 after 2010.
3. When your protected rights pension starts to be paid, there will no longer be any requirement for the pension to increase each year. You will be able to choose if you still want this.

As now, if you are married at the time of your death, any protected rights must be used to provide an income for your surviving spouse.

Preparing for the future

Protecting your pension benefits

If you think you might exceed the pension fund lifetime allowance limit before A-Day, or when you retire, you can protect this and reduce or eliminate any excess tax liability.

You can also safeguard any rights you have under your pension scheme to a tax-free cash sum in excess of the new 25% limit that will be set after A-Day.

There are two options available to you:

• Primary protection - if your pension fund value exceeds £1.5 million on A-Day, a new personal lifetime allowance will come into play for you. This is linked to the new lifetime allowance. As long as any further growth in your fund doesn’t exceed the annual increase in this allowance, you won’t be penalised. If it does, the excess will be taxed at 25% if benefits are taken as income, or 55% if taken as cash.
  
  It also protects any entitlement to tax-free cash before 6 April 2006, in excess of 25% of the fund, which will grow at the same rate as the increase in the annual allowance.
• Enhanced protection – this option allows you to protect the full value of your fund and any existing tax-free cash allowance greater than 25% of your fund value. However, once you have arranged this protection, you will not be able to make any further contributions or accrue any further benefit.
  
  You’re free to register for either or both of these types of protection. But it’s important that you make any decision before A-Day. That’s because if you select Enhanced Protection you cannot make any further contributions to your plan after A-Day.
  
  Whichever protection you decide to go for, you need to contact the Revenue to register your protection rights and the type of protection you want by 6 April 2009.

Death benefits

A number of changes to death benefits will be introduced as a result of A-Day.

If you die before you take your retirement income, the value of your pension fund may be paid to your beneficiaries in cash. However, if this value exceeds the lifetime allowance of £1.5 million in 2006/2007, then the excess will be taxed at 55%. Alternatively, unlimited dependant’s pension can be provided.

We can Help

To ensure you obtain the maximum benefit from this pensions revolution please contact us to obtain unbiased advice on your options and opportunities before and after A-Day.