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Taking your pension - pension simplification - pension rules from 6 April 2006

(Last updated: 6 April 2011)

On 6 April 2006 the Government introduced new legislation to simplify pensions in the UK. Since this date one new set of rules has applied to all pensions replacing all the different rules that previously applied to each different type of pension. From 6 April 2011, HMRC made more changes to how some of these rules worked. This web page provides a summary of the main changes and their likely impact.

To see what impact the new tax regime has on your policy click on the link below which matches your policy type.

Adobe Acrobat Personal Pension Plan (17Kb) Adobe Acrobat Free Standing Additional Voluntary Contributions (FSAVC) (17Kb)
Adobe Acrobat Contracted-out Personal Pension (APP policy) (16Kb) Adobe Acrobat Executive Pension Plan (EPP) (17Kb)
Adobe Acrobat Retirement Annuity Contract (S226 policy) (17Kb) Adobe Acrobat Section 32 Buy-out Bond (16Kb)

What do the rules say about the following?

The Standard Lifetime Allowance (SLA)
From 6 April 2006, a maximum limit applies to the savings that you can build up in registered pension schemes without receiving a tax charge. This figure, known as the Standard Lifetime Allowance (SLA), is £1.8 million for the 2011/2012 tax year and is reducing to £1.5 million from 2012/2013 onwards. There will be different ways of calculating the value of your savings, depending on what type of pension(s) you have (you will be able to have as many different types of pension as you wish, as long as your total pension savings do not exceed the SLA).

If the value of your pension fund exceeds the SLA when you take benefits you may be subject to a tax charge. If you draw a pension from savings above the SLA, there is an immediate tax charge of 25% of the excess over the SLA with the remaining pension taxed as income, otherwise it is 55% if you take it as a lump sum.

If you registered for Primary and/or Enhanced Protection with HM Revenue and Customs (HMRC) by 5 April 2009 your savings may be protected from this charge.

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The Annual Allowance
All the old rules restricting contributions into pensions ceased to apply on 6 April 2006. Instead, an Annual Allowance applies to all contributions or increases in the value of benefits. Between 2006/2007 and 2010/2011 the Annual Allowance increased from £215,000 to £255,000. From 6 April 2011 the Annual Allowance has reduced to £50,000. It will be subject to review after then. You will get tax relief on contributions for up to 100% of your UK earnings (or £3,600 if higher if a relief at source scheme is operated). So, if you earn less than £3,600, you can still get tax relief on contributions up to this amount. Your employer will get tax relief, irrespective of how much they pay into your pension scheme(s). Some things are excluded from the test against the Annual Allowance, for example contracted-out rebates and pension transfers.

If you exceed the new Annual Allowance in the current tax year you may be able to carry forward unused allowance from the three previous years. With the benefit of carry forward, it may be possible to contribute more than £50,000 in any one year without suffering a tax charge.

For the purpose of calculating this, the annual allowance in each of the three tax years before 2010/2011 is £50,000.

The Annual Allowance does not apply for the tax year:

  • when you die, or,
  • if you take your benefits as a serious ill-health lump sum.

The end date of your first pension input period (the time that your pension contributions are measured for a tax year) will be set at 5 April 2007. Subsequent pension input periods will then be based on the tax year.If your contributions in a single tax year exceed the Annual Allowance, you will pay tax on the excess. You will also be taxed in the same way if you are a member of a defined benefit occupational pension scheme and any increase in benefits takes the value of your benefits over the Annual Allowance.

If you feel you may be affected by the changes to the Annual Allowance you should consult your financial adviser.

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Tax–free cash (Pension Commencement Lump Sum)
You are generally able to take up to 25% of the value of your pension savings as a tax-free cash lump sum (also known as the pension commencement lump sum). This is subject to a maximum of 25% of your available SLA. You will be able to take tax-free cash from Additional Voluntary Contributions (AVCs), Free Standing Additional Voluntary Contributions (FSAVCs) if you have paid these to top up your employer’s pension scheme, and from an Appropriate Personal Pension policy (contracted-out benefits).

There is protection of tax-free cash (TFC) on some schemes when you have a right under the old rules to more than 25% of the fund on 5 April 2006. This is on Occupational Pension Schemes, such as Executive Pension Policies, or Section 32 Buy-out Bonds.

You do not have to register for this protection if your tax free cash was worth £375,000 or less as at 5 April 2006, but you will need to provide the information we ask for if you want us to calculate any higher amount, otherwise you will not be able to receive it.

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Taking an income from your pension
You will be able to draw a pension at any time once you have passed the minimum pension age. If you want to take some of your pension fund as TFC you must start your pension at the same time. The type of income you can choose will depend on which sort of pension you have and what options your pension scheme or pension provider decides to offer. There are three main types of income:

  • Lifetime regular payments where you use your pension funds to buy an annuity from an insurance company. You are then guaranteed to receive an income for the rest of your life and you may include a pension to be paid to your spouse or dependants when you die.
  • An income directly from the pension scheme. This will be similar to lifetime regular payments but will usually be from defined benefit company pension schemes.
  • Income Withdrawals where you take an income directly from your pension fund without buying an annuity.

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Commutation (Triviality)
You may be able to exchange all of your pension funds for a lump sum if your pensions are worth less than £18,000. 25% of this will be tax-free and the rest will be subject to income tax. This opportunity can only be taken from age 60 or over and all benefits must be taken within a 12-month period.

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Death benefits
If you die before your 75th birthday and before taking your pension, any lump sum death benefits will normally be tax-free. The lump sum will be tested against the SLA so there will only be tax to pay if the lump sum is more than the SLA.

If you die after your 75th birthday but before taking your pension, any lump sum death benefits will automatically be subject to a tax charge of 55%.

If death benefits are not paid out within two years of notification of death, they may attract a 40% tax charge.

It is a good idea to make sure you keep all pension schemes and providers up to date with details of beneficiaries in case you die before taking your pension.

When you start to receive your pension you can choose to have a guarantee period of up to 10 years. If you die during your guarantee period, your pension payments are guaranteed to continue until the end of that period. They are normally paid to your estate or a dependant.

Alternatively, you may be able to choose an annuity protection lump sum. This means on your death the value of your annuity fund, less any gross pension payments you have already received, is paid as a lump sum. This kind of lump sum is subject to a 55% tax charge. Windsor Life does not offer annuity protection lump sums.

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Minimum pension age
Normally, you must be at least 55 to take your pension benefits. You can take benefits earlier than this on grounds of ill-health or if you have an earlier 'protected pension age'.

Under the protected pension age rules, if you started your pension policy before 6 April 2006 in connection with an occupation where there is an existing contractual right to retire before 55 (and these rights were documented before 10 December 2003), you can normally keep this right. The rules also protect members of occupational pension schemes that have normal retirement ages.

When pension benefits are taken early under the protected pension age rules, the lifetime allowance is reduced for each year before age 55. This reduction does not apply if benefits are taken early on grounds of ill-health.

It is also possible to take your pension benefits, and carry on working for your employer.

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Notes:
We have produced this information as a brief summary of HMRC pension rules from 6 April 2011. The Government could modify the existing legislation. The rules of a particular pension scheme may be more restrictive than the regulations permit. Some of the new options available under these rules may not be available from all providers.

This information should not be regarded as personal advice and does not constitute a personal recommendation. We are unable to say exactly how the changes will apply to you as every case is different and we are unable to give advice.

If you are unsure what to do we suggest that you take independent professional advice to find out how the new rules will affect you. This will be at your own expense.

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