Pension tax 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:-
Lifetime allowance
Each member of a pension scheme has a maximum permitted tax-exempt fund at retirement. This is currently £1.8 million, although this will fall to £1.5 million from April 2012.
Contributions & The Annual Allowance
There is an annual pension input allowance, (known as the Annual Allowance) set at £50,000 (for the 2011/2012 tax year). To benefit from tax relief on contributions an individual can contribute up to 100% of their earnings or £3,600 whichever is the greater.
Pension Commencement Lump Sum (Tax free Cash)
The maximum pension commencement lump sum (Tax Free Cash) for most pension arrangements is 25% of the value of the pension rights.
Retirement Age
The concept of a normal retirement age is less definite than it was in the past, members of pension schemes can choose when to take their benefits, making the process of retiring more flexible. The minimum age for drawing benefits is 55.
Death Benefits
The maximum lump sum death benefit is simply equal to the lifetime allowance, so initially this will be £1.8 million, but will fall to £1.5 million from April 2012.
(There are transitional provisions made in respect to some of these key areas of planning and in respect to overfunding the goverment have introduced some tax charges.)
Drawing your pension
Retirement income is classified under 3 main headings:-
1) Scheme Pensions - typically, drawing your income directly from your employers occupational pension scheme.
2) Lifetime annuities - taking your income as an annuity. Commonly associated with drawing income from Personal pension / Stakeholder pension type schemes
3) Drawdown Pension - Income Drawdown and Phased retirement
All references to taxation are based on current taxation law and may be affected by future changes in legislation and the individual circumstances of the investor.