A Day

In December 2002 the Government announced radical proposals to simplify the structure of pension schemes. Whilst promising to maintain generous tax incentives they wish to create easy to understand and flexible structures for all contributors.

After industry consultation, the Government confirmed the basic outline in the last Budget. These are the key facts: -

A Day

1) The proposals for pension simplification will be implemented on ‘A Day’ which is 6th April 2006.

Annual Allowance

2) There will be an annual allowance set at £215,000 in 2006/07. This will increase by £10,000 each year so that in 2010 it will be £255,000. The allowance will be applied to contributions to defined contribution schemes and will be reviewed every five years.

Contributions and Tax Relief

3) Unlimited individual contributions but tax relief limited on contributions to the higher of £3,600 a year and 100% of remuneration. There will be no limit on contributions that can be paid by an employer. Tax relief on an employer contribution is unlimited in most cases.

Lifetime Allowance

4) The main feature of the simplified regime is a single lifetime allowance for every individual on the amount of tax-privileged pension they are able to have. The Government will set this at £1.5 million initially and this will increase as follows: £1.6 m in 2007, £1.65 m in 2008, £1.75 in 2009 and £1.8m in 2010. The lifetime allowance will be reviewed every five years.

Pension Age

5) The minimum age for taking benefits will increase from age 50 to age 55 by 2010; pension schemes will decide how to make this change. All benefits will have to be vested by age 75 either by an annuity or by Alternatively Secured Income (ASI).

Form of Retirement Benefit

6) Up to 25% of a pension fund (up to the lifetime allowance) can be taken as tax-free cash.

Concurrency

7) Full concurrent membership of occupational and personal pension schemes will now be available to all individuals.

Death Benefits

8) These benefits can be paid in the form of a lump sum and/or dependant’s pension. A tax charge of 55% will be applied to any part of the benefits paid as a lump sum that is in excess of the Lifetime Allowance.

Summary

Pension simplification poses possibly the most radical and far reaching changes to private pensions within the UK for well over a decade. Every employer and consumer with a pension plan will need to review just how benefits are to be provided going forward in the run up to A Day and beyond.

The above outline is intended only as a guide and represents our interpretation of proposed legislation. We strongly recommend that all pension contributors seek professional assistance to fully understand the changes and how they may be affected.