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Main
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Major changes to the
pension scheme rules took effect on 6 April 2006. All registered pension schemes are now
subject to similar rules, regardless of when they were set up. It was, and in some cases still is,
possible to protect certain rights and benefits built up before 6 April
2006 from tax penalty under the new regime.
Maximum Contributions
Employees
and self-employed people aged under 75 can contribute up to 100% of their
earnings to their pension scheme each year and receive tax relief. Combined
employer and employee contributions up to £215,000 in 2006/07 are allowed
with no adverse tax consequences for the individual. This limit will rise
in future years. People with little or no earnings can contribute up to
£3,600 a year and qualify for basic rate tax relief.
Tax Relief
There
are three methods of giving tax relief to individuals’ contributions.
·
Employees’ payments to an occupational pension
scheme are normally deducted from pay before calculating tax – the
net pay arrangement.
·
Most other individuals make payments after deducting 22%
tax – relief at source – and claim any higher rate relief from
HMRC.
Most providers of pre-July 1988 retirement annuity
contracts do not operate relief at source and relief for contributions is
given by deduction from total income, usually claimed via the
self-assessment return. The same method applies to General Practitioners
and dentists who are taxed as self-employed but are members of the National
Health Service Pension Scheme.
Maximum
fund or value of benefits
There is a lifetime limit on an individual’s tax-exempt
fund – or its equivalent value in benefits. This lifetime allowance
is £1.5 million in 2006/07 and will rise in later years. The lifetime
allowance is subject to transitional reliefs, which must be claimed by 5
April 2009.
Tax-free
lump sum
The maximum tax-free lump sum that can be drawn when taking
benefits will normally be 25% of the fund. Rights to a greater lump as at 5
April 2006 can be protected by transitional reliefs.
Retirement
date
From 6 April 2010, the earliest age at which most people will
be able to take retirement benefits from their pensions will rise from 50
to 55. Employees can continue working for an employer while they receive a
pension from the same employer’s occupational scheme.
Death
benefits before retirement
The maximum lump sum death benefit is the amount of the
lifetime allowance, ie £1.5 million in 2006/07. It is normally free of all
tax.
Pension
retirement income
The main options for drawing income at retirement are:
·
Members of occupational pension schemes normally receive
a scheme pension paid out by the scheme itself.
·
Individual schemes (such as personal pensions) normally
pay out secured pensions in the form of an annuity
·
Individuals who are not members of occupational final
salary schemes can draw unsecured pensions directly from their pension
funds up to age 75. At that point they must either buy an annuity or take
an alternatively secured pension (ASP). This is a restricted form of income
withdrawal that could provide some limited death benefits.
Investment
rules
A single set of investment rules applies to all types of
pension scheme. Investments in residential property (with a few exceptions)
and in tangible movable assets – eg antiques, art, jewellery and fine
wine – may trigger tax charges of up to 104% in certain schemes.
Borrowing to fund property purchase or any other investment cannot exceed
50% of the net value of the fund.
Taxation
of the fund
Pension funds are free of UK
tax on investment income and capital gains, but are not repaid tax credits
on UK
dividends.
Penalties
for exceeding limits
There are substantial tax penalties for exceeding the lifetime
or annual allowances and other penalties for making unauthorised payments.
The Dyer Partnership, 17 Westminster Court,
Hipley Street,
Old Woking, Surrey GU22 9LG
Copyright © 2002 - 2006 The Dyer Partnership
Limited
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