After much hype, and a few trials and tribulations along the way, the new Pension Simplification Rules have finally been introduced.
| "In general the new rules bring very good news!" |
In general the new rules bring very good news! Most high earners can now contribute significantly more into any pension each tax year and it is no longer compulsory to buy an annuity by age 75. If you have a Protected Rights pension (applicable if you have ever contracted out of SERPS or S2P) or an Additional Voluntary Contribution (AVC) you will, for the first time ever, be able to take 25% of the fund as tax-free cash at retirement. The new rules also make it more practical to buy life cover (Term Assurance) within a pension and, thanks to income tax relief on the premiums, this can cut costs compared to conventional Term Assurance policies.
There are threats too, notably if your pension fund(s), including any life cover, exceeds the Lifetime Allowance (£1.5m for 2006/07) when you take pension benefits. Any amounts in excess of this allowance will be taxed at 55%, but you do have up to three years from A Day to protect against this. However if you select Enhanced Protection you are prohibited from making any contributions from 6 April 2006, so this is a decision that should not be delayed.
The decision to buy an annuity, already one of the biggest financial decisions most of us will ever make, has become more complex thanks to the new flexible arrangements that allow you to draw an income from your pension until you die. While an annuity will likely still be the sensible option for many, individuals with larger pension funds might prefer the flexibility of being able to vary income while leaving their pension fund invested for the rest of their life.
| "The cost of Sipps continues to fall..." |
Finally, the cost of Self-Invested Personal Pensions (Sipps) continues to fall. Sipps allow you to break free of the restricted fund choice imposed by many pension providers, opening up a far wider investment universe and higher quality fund management. It is certainly worth considering whether moving to a Sipp is practical and likely to benefit you.
You can view full details of the new rules in the pensions section of this website. Should you wish to discuss reviewing your pension arrangements please call us on 020 7189 9990.