Seniors Network - Citizens Pension

SWEEPING changes to personal and workplace pensions come into force on 6 April 2006 - dubbed A-Day. New tax rules will change when and how people can retire, how they pay in and what their funds may invest in. The aim of the rules is to make pensions simpler and more straightforward.

High flyers

There will be a limit on the value of any pension fund. A new lifetime allowance is being introduced. It will cap the total value of individual pensions at ?1.5m from April 2006, rising to ?1.8m by 2011. Anything in your fund above the limit at retirement will be taxed at a punishing 55%. Though only a minority of employees have funds that will be caught by the limit today, many middle ranking staff years away from retirement have the potential to be hit if investments grow well.

Personal pensions

Most pensions pay a tax-free lump sum on retirement, then a regular income. From A-Day, the tax-free amount will be fixed at a maximum 25 per cent. This is an increase for some pensions, but a reduction for others. Those who are entitled to more can protect their position beyond A-Day by asking for a certificate from the pension provider.

Some existing pensions, including Section 32 contracts and Retirement Annuity Contracts (RACs), may have more generous allowances for tax-free cash than the 25% of the fund that will be the norm after A-Day. These entitlements may be preserved beyond A-Day.

But if the pension is then modified or moved to another company, the extra allowances are lost. Similarly, some executive personal pensions also allow higher levels of tax-free cash. With these schemes, savers have the option to pay as much as they like into a pension before A-Day and then register their fund with the Inland Revenue.

Company pensions

Employers will be able to offer truly flexible retirement options for the first time, allowing staff to work part-time and draw a pension from the same company. And it will be possible to draw pensions built up from additional voluntary contributions (AVCs) at a different time from a main pension, and to take AVC money as tax-free cash.

But there is a catch. Most company schemes are run under their own rules. Employers will have to change these rules if pension scheme members are to benefit from the new flexibility, and some may be slow to do so.

Restrictions on the percentage of salary you can put in a pension fund will be removed enabling retirement savers to put 100% of their earnings into their fund tax-free. Anyone who earns more than ?35,000 a year and has a company pension will no longer be barred from starting a separate personal pension.

Assets you can hold in your pension

Rules governing how property can be held in a pension fund are also due to be revamped. At the moment, cash held in a pension fund may be used to invest only in commercial property. And a pension can be used to back a mortgage of up to 75% of the property's value to help fund the deal.

The industry was geared up to cope with a rush of buy-to-let properties and second homes being put into self-invested personal pensions (Sipps) but Gordon Brown outlawed this in his December Pre-Budget report.

Pension Age

Perhaps less popular will be the change to the pension age. Currently, it is possible to draw a pension at the age of 50, but this will rise to 55 from April 2010.