Planning for retirement became rather simpler in April 2006, when the previous plethora of regimes for non-state pensions were swept away and replaced by just one.

Contributions: It is now possible fur just about everyone in the UK to put aside anything from £3,600 to their entire earnings (subject to an annual limit (see table) and to build up a fund right up to a generous lifetime allowance. Employers can also contribute, topping up personal contributions to the same limits.
 

Tax relief is available on all contributions at the highest rate paid – even no tax-payers receive 22% tax relief, as personal contributions are paid net of basic rate tax relief. (You cannot receive more tax relief than you pay in tax, once you have exceeded the basic £3,600 contribution.) Higher rate tax payers receive their additional relief through the self assessment system.

It is possible to contribute more than your income in any year, but there is no tax relief and, if the contribution is made by an employer, there will be a tax charge.

Growth: Pension funds can be invested in a wide range of assets, either through collective investments such as insurance company funds and unit trusts, or using a self invested pension arrangement. Schemes can be set up by companies or individuals and the rules are virtually identical.

Benefits: Everyone is now entitled to take 25% of their entire pension fund, currently free of tax, at any time after age 50* (rising to age 55 in April 2010) up to age 75.

They need not take an income at that stage, if they do not wish to and can carry on working as before. However, if an income is required, this can be achieved by purchasing an annuity, as currently, or drawing an income directly from the fund (called an unsecured pension). This income can be anything from nothing to 120% of the single life annuity that could be purchased by the individual at the time.

From age 75, the maximum income that can be drawn falls to 70% of the annuity that could be purchased by a person of the same sex at age 75 (called an alternatively secured pension).

On death: In the event of death and an annuity has not been purchased any unused fund is treated as follows:

• Before benefits are taken (now called crystallisation) – the fund can be returned to the member’s estate or passed as determined by the trustees to another person (usually a nominated family member.
   
• After benefits have been crystallised – the unused part of the fund can be used to provide an income for a dependent or can be returned to the estate, subject to a tax charge of 35%.
   
• If age 75 has been reached and an alternatively secured pension is being drawn – any unused part of the fund must first be used to secure a dependents income and only if there are no surviving dependents can it be used as a charitable donation, or for transfer to the pension fund of another member of the same scheme.

Our highly qualified specialist advisers can help you decide on a suitable way of building up your retirement fund. We can also assist in deciding what to do at retirement.

* Some occupational schemes will not currently allow this, but their rules must be changed within a defined timescale.

© 2006 Bennett Brooks
Financial Planning Ltd.

The guidance and/or advice contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK
 
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