Pensions

Pension Simplification


From 6th.April 2006 the way we save for our retirement and the way we take our pension benefits changed dramatically.
New terminology came with the changes and I will give you a brief resume of the relevant areas:-
Life Time Allowances
Individuals now have a Life Time Allowance of £1.5 Million ( pension fund value ) – rises each year -to base his/her pension fund on starting tax year 2006/07. Any excess in that fund value attracts a recovery charge on the fund of 35%.
Stakeholder Pension
No change, contributions to the pension must not exceed £3,600 pa. If the contribution exceeds this then the contributor’s income has to be verified. This still allows non earners to contribute.
Annual Allowance
The total contribution to a pension(s) can be 100% of earnings up to £215,000 (increases each tax year) which is your Annual Allowance. This amount includes your and your employer’s contribution.
Minimum Pension Age
50 for both Protected and Non protected rights rising to age 55 in 2010.
Your choices at retirement are:
Secured Income
  1. Lifetime Annuity - As before, you buy an annuity which will pay an income for you lifetime and if selected an income for a dependent.
  2. Capital Protected – This pays an annuity but if the annuitant dies before the age of 75 the contribution less any annuity payments less a 35 % tax charge will be repaid.
Scheme Pension –Defined benefit i.e.superannuation
Unsecured Income (USP)
  1. Limited Period Annuities. Only a 5 yr term
  2. Income Drawdown – No real changes apart from there is no real requirement to take income,available up to the age 75 yrs.
Alternative Secured Pension (ASP) - A hybrid of unsecured and secured income only available to money purchase scheme members aged 75 and over. It is a form of income withdrawal.
Pension Commencement Lump Sum – Was called Tax Free Cash Sum, will either be, or be very close to 25 % of the fund value. Tax free cash can now be taken from the protected rights, AVC’s and Free Standing AVC’s
Alternative Secured Pension (ASP) – Can be taken after the age of 75yrs, instead of purchasing a secure income. (annuity)
Trivial Commutation – If you’re total pension fund values are less than 1% of the LTA (£1.5 mill), including benefits already being paid, then the pension fund can be taken as a lump sum, 25% tax free and the remainder taxed as earned income.
State Pension – You can defer taking your pension, and when you take the deferred pension it will be paid as a lump sum (subject to tax).