Pensions Tax Simplification

Pensions Simplification - A Summary of the New Rules

On 6 April 2006, new rules came into effect around how pensions are taxed, offering simpler and more flexible retirement arrangements. This is what you need to know:

  1. The many existing sets of rules governing the taxation of pensions were replaced with a single, universal regime.
  2. For the first time, everyone will be able to save in more than one pension scheme at the same time.
  3. There is no limit on the amount of money you can save in a pension scheme or the number of pension schemes you can save in - although there are some limits on the amount of tax relief you can get.
  4. You will get tax relief on contributions up to 100 per cent of your annual earnings. So if you put £100 into your pension scheme, the tax relief the Government gives you on that is worth at least £25.
  5. There is an annual allowance of £225k in 2007-08 (rising to £255k by 2010-11). If in a tax year your annual pension savings are greater than this, you may be liable to a tax charge.
  6. Even if you are not a taxpayer you can still get tax relief on pension contributions. You can put in up to £2,880 in any one tax year and the government will top this up with another £720 - giving you total pension savings with tax relief of £3,600 per year.
  7. The new rules introduce flexible retirement, allowing people in occupational pension schemes to continue working while drawing their pension, where the scheme rules allow it.
  8. If your scheme rules allow, you can take up to 25 per cent of your pension fund as a tax free lump sum.
  9. If your pension pot is more than the 'Lifetime Allowance' when you come to take your pension you may be subject to a tax charge at that time. But this will only apply if your total pension savings are in excess of £1.6 million from 6 April 2007 (rising to £1.8m by 2010-11 and reviewed thereafter).
  10. Those individuals with larger pension pots on 6 April 2006 will be able to protect their funds from the Lifetime Allowance Charge by completing and submitting the appropriate form to HMRC. They have until 6 April 2009 to do this.
  11. The rules on when you can take your pension will change. From 6 April 2010 you will not be able to take a pension before you are 55. There are a couple of exceptions: you will still be able to retire early due to poor health, and if you have the right to retire before 50 at 6 April 2006, that right may be protected.
  12. A full list of pension scheme rates and allowances are available.

Return to the Pension Schemes Services homepage.