Pension Rules Post April 2006 - Financial News Autumn 2005

01 October 2005

The main changes to pension legislation after April 6 next year are as follows:

Lifetime allowance

Funds valued over £1,500,000 at retirement will be taxed at a rate of up to 55% on the surplus. This allowance will increase each year. Members of pension schemes with substantial funds can protect their funds, but this must be done within the next three years.

Contributions

Individuals will be able to contribute an amount equivalent to their taxable earnings into pension schemes and receive tax relief. This is subject to a maximum of £215,000. This limit will also increase each year. Contributions above this will be taxed at 40%.

Tax-free lump sums

All new schemes will have the ability to take tax-free cash at retirement limited to 25%. Existing schemes moving to newer schemes at retirement e.g. income drawdown, will be subject to the new rules. Initially existing schemes will be protected.

Income drawdown

There will still be the facility to draw an income from the pension fund at retirement, rather than purchase an annuity. The minimum drawdown will be nil, creating more flexibility to those phasing in their retirement.

Drawdown after 75

Alternative Secured Income provides a limited version of income drawdown after the age of 75, at which point previously it was compulsory to purchase an annuity.

Small funds

Where an individual has funds totalling not more than £15,000, this can all be taken as cash, although taxable.

Self Invested Personal Pensions (SIPPs)

Currently SIPPs can borrow up to 75% of any commercial property purchase. This will be limited to 50% of the net assets of the SIPP. This could make it more difficult for companies to purchase properties through their pension scheme. The rule that prohibits companies purchasing their existing property will go.

Residential property will become available as an investment within pension schemes, these same borrowing rules will apply.

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