TAXATION

Pensions A-Day arrives

There will be major changes to the tax rules for pensions from 6 April this year, which has been designated A-Day by HM Revenue & Customs (HMRC). Contributions will still qualify for full tax relief and pension funds will grow largely free of UK tax. Otherwise, the changes will be radical and will include the following:

Today’s eight different sets of rules for different types of pension arrangement will be replaced by one new set of rules that will apply to all pension schemes.
Your pension benefits will be subject to a lifetime allowance, initially £1.5m. This will effectively set an upper limit on the value of tax-efficient pension benefits that you can have.
The current limits on the amounts you can contribute to your pensions will disappear and instead you will have an annual allowance, initially of £215,000. Your maximum effective personal contribution to pension arrangements will normally be 100% of earnings.
As a general rule, you will be able to draw a quarter of the value of all your pension arrangements as a tax-free lump sum.
You will not have to buy an annuity by age 75, but you must draw any tax-free lump sum before then.
There will be new rules restricting borrowing by pension schemes. However, following a change announced in the Pre-Budget Report, investment in residential property and assets such as fine wine and antiques will be heavily penalised.
The minimum age at which you can normally draw your retirement benefits will rise from 50 to 55 on 6 April 2010.

The new rules are accompanied by a raft of transitional reliefs, which will generally protect you from any tax penalty on actions taken or funds built up before A-Day. Some of these reliefs are given automatically, while others must be claimed.

Whatever pension arrangements you have - or even if you have none - simplification means that you should arrange for a review of your retirement planning. The new rules open up many new opportunities, but also call into question some traditional ideas.

For example, if you are a private company shareholder/director, from April you might find it makes more sense to contribute to a self-invested personal pension (SIPP) rather than a small self-administered scheme (SSAS). At present the SSAS is more attractive because the contribution limit is normally higher, but from A-Day this difference disappears.

Not everyone will be necessarily better off under the new pension simplification rules. You might find that from A-Day it will not make financial sense to contribute to a pension plan. For that reason, if for no other, you should talk to us before making any pension contributions after A-Day.