Pension rules and regulations are quite complex. Below we have provided an outline of some of the main rules. However, we recommend that you seek professional advice from a Pensions expert prior to acting on any of the information contained below.
Pensions are the most commonly used method of saving for your retirement. By making regular contributions into a pensions fund from your wages, you can be guaranteed a regular income after your retirement.
Pensions are also a very tax efficient method of saving, since the contributions you make into the fund are not taxable, and the growth of the pensions fund is also tax free, unlike investments in shares, or cash deposits.
Individuals without relevant earnings (salary) can pay up to £3,600 per annum into their pensions funds and receive tax relief. Employed and self employed individuals with relevant earnings can pay up to £3,600 or 100% of earnings if greater, subject to the overall annual allowance. Details of what constitutes relevant earnings can be found at www.hmrc.gov.uk
Employers can make unrestricted contributions provided the total of employee and employer contributions do not exceed the annual allowance.
The Annual Allowance is an annual limit set by HMRC. Contributions paid in excess of this amount are unlimited but will give rise to a tax charge on the pension scheme member.
The Annual Allowance for the tax year 2013/14 is £50,000, inclusive of your own contribution and any other amounts paid into an approved pension scheme. The Annual Allowance increases each year.
Lifetime Allowance (LTA)
The Lifetime Allowance is the total value of all your pension funds, including personal and work-related pensions, but not including any state pension, which you can build up without paying extra tax. The LTA is not a limit on the value of your pension, it is a limit on the amount of tax-relieved pension saving that you can have. So, while there is no limit to the size of your pension, you may be required to pay extra tax if it is worth more than the Lifetime Allowance.
Most people will not reach the Lifetime Allowance, and will therefore be unaffected by this rule.
The value of the Lifetime Allowance increases each year, for example in 2007-08, the Lifetime Allowance was £1.6m, in 2008-09 it was £1.65m, in 2009-10 it is £1.75m, and in 2010-11 it will be £1.8m.
Tax Free Cash Lump Sum
Many people are aware that they will receive a tax free lump sum when they take their pension. The lump sum is typically 25% of the whole fund value. For example, if their pension fund is worth £200,000, then they could receive a tax free lump sum of £50,000.
Changes to the pension rules in April 2006 make it easier for people to take the lump sum from their pension now, while leaving the rest of the pension in place to take when they retire.
If you are aged between 50 and 75, then you may wish to consider releasing a tax-free lump sum from your pension. See our Pensions Release section. Please note, your pension is a very valuable asset aimed at providing you with an income when you are no longer working. Once a decision is made to take the benefit from your pension, it is irreversible. We would advise you only to take a lump sum from your pension if it can be used to make a permanent change to your financial circumstances. New cars and holidays may sound attractive, but we would ask you to consider the longer term impact to your lifestyle if you were to use the benefit for such a purchase.
Minimum Retirement Age
The minimum retirement age will be increased from 50 to 55 from 6th April 2010.
If the value of your pension fund is below a certain level, it may be possible to cash in the pension fund, and receive a cash lump sum. This right was brought in from 6 April 2006. However, this option is only available where the total of all your pension funds does not exceed 1% of the Lifetime Allowance. For the tax year 2009/10, this will equates to £17,500.
Help & Advice
There are many different options to consider when choosing a personal pension and it makes sense to take advice from a qualified pension specialist who is independent and can offer you products and services from the whole of the market place.