‘A’ Day (the Appointed day) arrived on 6th April 2006 and brought with it sweeping and radical changes in relation to pension legislation.
This has created a single universal regime that replaced the previous eight tax regimes and the changes affect all savers in occupational and personal pension schemes, employers and financial advisers.
Pension simplification introduced two new controls, the pension Lifetime Allowance (LA) and pension Annual Allowance (AA).
From April 2006, there is now just one set of tax rules for all types of pension, with an individual LA of £1million (2017/2018) and an individual AA of £40,000 (2017/2018), which now tapers down to £10,000 for high earners. Most individuals are able to fund up to these limits with the possibility to also carrying forward unused AA from the previous 3 years. Unless they are subject to the reduced money purchase annual allowance which is detailed below.
High earners with income in excess of £110,000 p.a. may have a reduced annual allowance of £10,000 under the tapered annual allowance rules. Individuals who have already flexibly accessed part of a pension scheme will only have an AA of £4,000.
Exceeding either the LA or the AA will simply trigger a tax charge.
Other changes included:
- Early retirement age available from age 55
- Full concurrency (i.e. being able to pay into any array of plans you wish), subject to the annual allowance and potential for carry forward
- Wide investment flexibility
- Up to 25% Tax Free Cash
- The ability to commute ‘small’ funds as a one off lump sum as opposed to having to draw a regular income from age 55 (subject to part of the fund being taxed)
- Options at retirement when deciding to take benefits such as capped or flexible drawdown
- No need to secure benefits at age 75 via an annuity
In addition another raft of changes introduced in April 2015 also gives individuals further and greater flexibility to access their pension savings from age 55.
The changes also include:
- Increasing the flexibility of the drawdown rules by removing the maximum ‘cap’ on withdrawal and minimum income requirements for all new drawdown funds from 6 April 2015;
- Enabling those with ‘capped’ drawdown to convert to a new Flexi-access Drawdown fund once arranged with their scheme;
- Enabling pension schemes to make payments directly from pension savings with 25% taken tax-free, known as the Uncrystallised Fund Pension Lump Sum (UFPLS) option;
- Removing restrictions on lifetime annuity payments;
- Ensuring that individuals do not exploit the new system to gain unintended tax advantages by introducing a reduced money purchase annual allowance (£4,000 2017/2018) for money purchase savings where the individual has flexibly accessed their savings; and,
- Increasing the maximum value and scope of trivial commutation lump sum death benefits.
Pensions are a long term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change; therefore the tax treatment of pension benefits can and may change in the future.