The Finance Act 2004 introduced some radical changes from April 2006.
A key aim was to simplify the tax laws governing pensions to encourage saving for retirement.
The provisions to simplify pensions and make them more flexible are good news for the vast majority of the population, who can now save what they want, when they want, for their retirement without being subject to onerous tax rules and limits. A small minority of high earners, or those with very substantial pension rights, need to be aware of the allowance limits.
Change to Minimum Retirement Age
From April 2010 the minimum age for early retirement will be raised to 55. Existing members of the Social Housing Pension scheme as at April 2006 will retain the right to retire early from age 50.
No need to leave work in future to draw retirement benefits
In most cases there is now no need to leave work in order to draw your pension benefits. The exceptions are retirement on grounds of ill health, and (from April 2010) drawing benefits before age 55.
Annual Allowance
A member's maximum annual pension contribution was limited to 15% of gross salary. With effect from April 2006, this was replaced by an Annual Allowance initially set at £215,000 on 6 April 2006 and increasing yearly thereafter. Within this Annual Allowance, personal contributions of up to 100% of earnings will attract income tax relief. The vast majority of occupational pension scheme members will be able to pay considerably higher pension contributions if they wish.
Lifetime Allowance
Prior to the reforms, pension benefits were (broadly speaking) limited to two thirds of final remuneration.
A new lifetime allowance has now been brought in, representing the total value of all pension savings on which a member may receive tax relief. This is expressed as a monetary value and was initially set at £1.5 million for 2006/2007. For the vast majority of savers this is a significant improvement, as they will be able to save as much as they like in a registered pension arrangement. Members will also be able to have concurrent membership of stakeholder and/or personal pension schemes whilst contributing to an occupational pension scheme. If the value of the fund(s) exceeds the lifetime allowance, however, they will face tax charges.
Broadly speaking, a member’s total pension rights from all sources would have to exceed £75,000.00 a year for the lifetime allowance to be breached. The Pensions Trust has contacted members who may be affected by the lifetime allowance.
Prior to drawing any benefits, members will have to certify that they have enough unused lifetime allowance to take their benefits. This will entail obtaining information from all approved pension schemes that a person has been a member of. If members don't provide this certification they will face an automatic recovery (tax) charge.
New Tax Free Cash Limit
The maximum tax free cash that a member will be able to take will be 25% of the value of their pension rights. Pension Schemes do not have to offer this level of tax free cash but the SHPS Committee decided to make this change to the scheme's rules.