Taking your pension - pension simplification - pension rules from 6 April 2006
(Last updated: 21 December 2007)
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.
This web page provides a summary of the main changes and their likely impact. Click here to access our leaflet giving you an overview of
the rules from 6 April 2006 (90Kb). 
In addition, HM Revenue & Customs have produced a leaflet entitled
'Pension Tax Simplification and You'. Click
here to view this document.
To see what impact the new tax regime
has on your policy click on the link below which matches your policy
type.
Scheme rules for Occupational Pension Schemes:
Trustees of Executive Pension Plan with Windsor Life as at 6 April 2006 are required to amend their scheme rules. If
you are an EPP trustee, please click here to obtain draft EPP rules (175Kb).
The trustees of all corporate pension schemes (including EPPs) formerly with TomorrowTM are also required to amend their scheme rules. If you are a trustee of a corporate pension scheme, formerly with TomorrowTM, please click here to obtain draft rules (176Kb).
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
£1.6 million for 2007/08 and will increase
to £1.8 million by 6 April 2010 and be subject to review after then. 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. There are ways that you can protect your savings from this charge,
which are known as Primary and Enhanced Protection.
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Primary Protection
This is available if you have total pension savings in excess of £1.5 million
as at 5 April 2006. By registering for Primary Protection, the value of your
fund as at 5 April 2006 becomes your personal lifetime allowance and will increase
by the same percentage terms as the SLA. However, any funds that exceed your
personal lifetime allowance will be subject to a tax charge of up to 55%. You
need to register with Her Majesty’s Revenue and Customs (HMRC) for Primary
Protection before you start to draw any benefits and the latest date for registering
is 5 April 2009.
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Enhanced Protection
This will be available to anyone, even where total pension savings are less
than £1.5 million on 5 April 2006. If the value of your total savings exceeds
the SLA when you come to draw your benefits, there will be no tax charge. You can only apply for Enhanced Protection if you have not made any contributions to any defined contribution Registered Pension Schemes since 6 April 2006. The only exception to this is contributions to Pension Term Assurance or Pension Life Assurance policies. (You may be able to
build up further pensionable service after 5 April 2006 if you belong to a
defined benefits arrangement but there are detailed rules regarding the level
of salary increases you can receive).
Provided the rules have been complied with, the latest date for registering with HMRC is 5 April 2009. You may download the HMRC protection form directly
from the HMRC website at http://www.hmrc.gov.uk/pensionschemes/protection.htm . Pre A-Day life cover arrangements may continue to be paid into policies paying
lump sum death benefits without invalidating enhanced protection.
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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. For 2007/08 the Annual Allowance is £225,000. This figure will increase to £255,000 by 6 April 2010 and 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.
The Annual Allowance does not apply in the last year before retirement or death.
The end date of your first pension input period 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 be
charged 40% 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 if any increase
in benefits takes the value of your benefits over the Annual Allowance.
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Tax–free cash (Pension Commencement Lump Sum)
Under the new rules, you will generally be 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 is 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.
If you believe
you are likely to be entitled to tax-free cash worth more than £375,000 (25%
of £1.5m) from your current pensions, with effect from 6 April 2006 you will
be able to register to keep this higher amount. Registration must take place
with HMRC by 5 April 2009.
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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
do this by age 75 and 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 will be four
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. This will be available only until age 75.
- When you
reach age 75, rather than buy an annuity you can elect to take an "Alternatively
Secured Pension", which is similar to Income Withdrawals.
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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 1% of the SLA in total value (i.e. £16,000
for the 2007/08 tax year). 25% of this will be tax-free and the rest will
be subject to income tax. This opportunity can only be taken between the
ages of 60 and 75 and all benefits must be taken within a 12-month period.
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Death benefits
Any pension benefits paid on death before retirement count against the SLA.
Furthermore, pre-retirement death benefits that exceed the SLA will be subject
to a tax charge. Unless death benefits are paid out within two years of death,
they will attract a 40% tax charge. Spouses or dependants must inform schemes
promptly if a scheme member dies before retirement. You should always ensure
you keep all pension schemes and providers up to date with details of beneficiaries
in the event you die before retirement.
Under the new rules, you can choose to have a guarantee period of up to 10
years after retirement. If you die during this time, payments to your
estate will be made as pension payments rather than as a lump sum. Alternatively,
you may be able to choose an annuity protection lump sum, where the death
benefit is a return of the original cost of your pension as a lump sum
less any gross pension payments made. This is payable only on death before
age 75 and will be subject to a tax charge of 35%.
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Minimum pension age
The minimum retirement age to be applied to all pension arrangements under
the new rules is 50. From 2010, this will increase to 55. If you are in an
occupation where there is an existing contractual right to retire before 55
(and these rights were documented before 10 December 2003), you will be able
to retain this right. The rules also protect people who currently have pensions
with low retirement ages (such as sporting professionals) to preserve this
retirement age for their existing pensions. However, when benefits are taken
below age 50, a lower lifetime allowance applies.
Under the new rules you will be able to carry on working for your employer
and still take the benefits from your pension scheme.
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Retirement Annuity Contracts
The new rules bring significant changes to Retirement Annuity Contracts (otherwise
known as S226 pensions). One of the main changes is the level of tax–free
cash entitlement. This is currently directly related to the value of the annuity
available from a policy and varies with age. From 6 April 2006, the level will
generally be 25% of the fund value, falling into line with other pensions.
After 31 January 2007 you will no longer be able to pay contributions using
unused tax relief from previous years, which could restrict contributions if
you are a high earner.
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Notes:
We have produced this information as a brief summary of the pension simplification
changes that have applied since the Finance Act 2004, Finance Act 2005 and
relevant parts of the Pensions Act 2004 took effect from 6 April 2006. The information
is based on our understanding of current tax law and
practice and of the rules introduced on 6 April 2006. 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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