A-day arrives transforming pensions
Thursday, 06 Apr 2006 16:25
UK pensions are transformed as A-day arrives
On April 6th the UK's pension laws underwent their largest change in half a century.
Sweeping changes have come into force on what has become known as A-day, affecting every single Briton with a company or private pension.
The goal of these changes is to make life easier for investors and make the pensions industry more transparent - but millions of Britons know little or nothing about them or how the new rules will affect their pension plans (
full story).
The main goal of A-day is to simplify the UK's pension industry and make it easier to save for retirement. Towards these ends eight different sets of pensions rules have been combined into one - seeing all UK pension funds subject to the same tax regulations.
Some benefits that consumers should be aware of include being able to take out up to 25 per cent of your pension fund without being taxed on it.
Other major changes mean everyone can invest in more than one pension scheme at the same time; while tax relief on pension contributions is now available even to those who are below the income tax threshold.
People can also to contribute far more to pensions schemes - up to the value of their annual salary or £215,000, whichever is lower - but carry back and carry forward (which allowed people to use their previous year's pension allowance if it had not been used up) has been scrapped.
Another change is that people are no longer required to convert their pension fund into an annuity, which pays out a set amount each year for life. Previously, pension funds had to be converted by the age of 75, whatever the state of the market.
Additionally, people with self-invested personal pensions (Sipps) can now invest in a wider range of things than before - although not second homes, antiques, wine, or anything that can be used directly by the investor before their retirement.
However, there are also new limits involved.
All pension funds are now subject to the same lifetime allowance of £1.5 million, set to rise to £1.8 million by the tax year 2010/11. People can hold more than this in their pension fund, but it will be taxed at the rate of 40 per cent.
Additionally, people will not be able to claim their pensions until the age of 55 in the future - rather than the age of 50 as it is now - although this change has been put off until 2010.
Some of the key changes introduced on A-day:
Tax-free withdrawals from pensions funds will be fixed at 25 per cent (unless a scheme is worth less than £15,000) available to anyone over 50 (rising to 55 in 2010)
Pension funds gain access to investment in far more things - including some property
Pensioners are no longer compelled to convert their funds into annuities by the age of 75
The earliest age people can take their pension will be raised from 50 to 55, but this change will not come into effect until 2010
Carry back and carry forward will be withdrawn, in favour of larger annual allowances - letting workers contribute the equivalent of their entire annual income to a pension fund up to £215,000
A £1.5 million cap will be introduced to pension funds, with all assets held over this amount becoming subject to tax.
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