On 6 April 2006 the new pensions legislation comes into effect. If you have a private or company pension, you may need to do something about it now, otherwise you could lose out.
Those people who intend to retire over the next few years will be most affected. Some may be better off taking retirement benefits before A Day, while others would gain from waiting until the new regime comes in.
The overriding thrust of the new legislation is to sweep together all the different rules currently in force for different types of pension schemes.
The main changes in the legislation that will come into force on A Day are:
The minimum age at which you can start taking your private or company pension will be raised from 50 to 55 by April 2010. The same age limit will also apply to those who are currently able to take their retirement benefits from as young as 35 years old.
Those wanting to retire early might find other investment routes become more attractive. For those in a low retirement age scheme, they may want to start drawing their benefits prior to A-Day.
You will be able to invest up to the lower of either your annual earnings, or £215,000, in the 2006/07 tax year. The maximum limit will be increased by £10,000 each year until it reaches £255,000 by tax year 2010/11.
Everyone will be able to put in a minimum of £3,600 a year, as they can now, so you will still be able to contribute to a pension, even if you're not earning.
Most people will be able to put more into their pension than they do at the moment.
This is the most complex change. There will now be a Single Lifetime Allowance of £1.5m for tax year 2006/07. This means that if the value of your fund exceeds this amount and you retire in 2006/07, any excess will be taxed at punitive rates of up to 55% (although this partly reflects the fact that high earners will have received tax relief of up to 40% when contributing to the pension in the first place).
The lifetime allowance will increase to £1.6m in 2007/08 and then by £50,000 each year until 2010/11, when it will be £1.8m.
Youll be most affected by the changes if you have a pension that might exceed £1.5m and you should probably seek financial advice. However, you will be able to register with the Inland Revenue any pension you've amassed prior to A-Day, which will partially protect it from the additional tax rates.
Currently, all pension pots of more than £2,500 have to be used to purchase an annuity. However, from A-Day, you'll be able to take 1% of the Lifetime Allowance in cash. So, in tax year 2006/07, you'll be able to take a pension pot of below £15,000 in cash. In addition, up to 25% of this amount will be available tax free.
If you've got a small pension pot that you're about to convert, it might be worth hanging on until after A-Day.
Everyone will be able to take up to 25% of their pension, up to the Single Lifetime Allowance, as a tax-free lump sum.
Although some older pension plans allowed more than 25%, the biggest change here is likely to be for those who have made Additional Voluntary Contributions (AVCs). Currently, you cannot take AVCs as a tax-free lump sum, so it may be worth delaying taking these benefits until after A-Day if you're nearing retirement.
The requirement to take an annuity by age 75 will no longer exist. You'll have the option of taking an Alternative Secured Income instead, which may mean you'll be able to pass on any unused pension to a beneficiary after your death. However, you will still have to take an annual income from your fund, which will then by taxed. The minimum amount will be £1 a year and the maximum will be linked to annuity rates.
In addition, there will be two new types of annuity - the Limited Period Annuity and the Value Protected Annuity. The former lasts for just five years, after which time you can buy another one, or a normal lifetime annuity. The latter will pay out any unused amount to your heirs, but you'll get a lower income than a normal annuity.
Those about to take an annuity may want to wait for the new types to arrive and investigate the Alternative Secured Income option.
The rules governing what you can invest your pension contributions in will be relaxed with the biggest change being that you will now be able to invest in residential property.
You will also be able to borrow against your fund to invest in further property.
Buy-to-let investors will have more options after A-Day and more people may consider investing their pension fund in residential property.
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