Pension Allowances 2006 to 2011 - Simplified Pension Rules from 6 April 2006 -2011
“Pension simplification”, if only it really were that simple ……………now read on.
This section is here to help you make those all important decisions about your retirement and any existing pension funds you may have.
Annual Allowances - Maximum Yearly Pension Contributions
This is the maximum that can be invested in money purchase investment linked pension schemes for an individual during any one tax year.
Gone are the percentage of earnings figures and other complex calculations based upon your age and salary as a measure of the maximum you can pay into a pension.
Broadly speaking, you can invest an amount equal to your yearly salary each year in a pension fund up the maximum yearly limits. Your employer can technically invest up to the annual allowance, although this may need justifying if you earn £6000 pa and have £255,000 paid into a pension fund by your employer, particularly business controllers and company directors.
The yearly annual allowance limits are as follows:
For Tax Year 2006/2007 = maximum yearly pensions contributions of £215,000
For Tax Year 2007/2008 = maximum yearly pensions contributions of £225,000
For Tax Year 2008/2009 = maximum yearly pensions contributions of £235,000
For Tax Year 2009/2010 = maximum yearly pensions contributions of £245,000
For Tax Year 2010/2011 = maximum yearly pensions contributions of £255,000
NEW: For Tax Year 2011/2012 = maximum yearly pensions contributions of £50,000. PENSION ANNUAL ALLOWANCES WERE BEING FROZEN UNTIL 2015/2016 at £255,000 however, in October 2010 an announcement was made that the ANNUAL ALLOWANCE IS REDUCED to £50,000 with effect from April 2011.
** There have also been significant changes to Pension Tax Relief.
Lifetime Allowances - Maximum Pension Values In Your Life
The maximum that can be invested in money purchase investment linked pension schemes for an individual during your lifetime has an overall total fund limit.
The lifetime value limits are currently set as follows:
The Lifetime Allowance in 2006/2007 will be £1,500,000.
The Lifetime Allowance in 2007/2008 will be £1,600,000.
The Lifetime Allowance in 2008/2009 will be £1,650,000.
The Lifetime Allowance in 2009/2010 will be £1,750,000.
The Lifetime Allowance in 2010/2011 will be £1,800,000.
** PENSION LIFETIME ALLOWANCES WERE TO FROZEN UNTIL 2015/2016 at £1,800,000 HOWEVER UNDER CON-LIB BUDGET PLANS THE LIFETIME ALLOWANCE WILL NOW BE REDUCED AND FROZEN AT £1,500,000
What if I have more than this already?
There are transitional protection schemes in place to allow you to retain what you have invested and still be able to contribute to pension schemes.
How do you value a pension scheme that has no “value” e.g. a Final Salary Pension Scheme?
Lifetime Allowances - Maximum Tax Free Cash - Pension Simplification
1. Maximum Tax Free Cash
The maximum tax free cash available at retirement will be the lower of
What if I am already entitled to more tax free cash at retirement than this?
There are transitional protection schemes in place to allow you to register and protect the tax free cash entitlement you have accrued to 5 April 2006.
Contact us today and learn how you can get your maximum tax free cash.
2. If your combined pension fund values exceed the lifetime allowance these will be subject to tax.
Exceeding Lifetime Allowances may mean that you have tax penalties unless you have protected them.
Tax Free Cash Sums and Excess Cash Sums
You are still able to withdraw 25% of the pension fund as a tax free cash lump sum. However, the excess funds (above the Lifetime Allowance) are taxed at 55%.
Excess Pension Fund For Income
You will still be able to use the excess fund to provide you with a pension income. However, the excess funds will be taxed at 25% before then being converted to give you an income.
What if I am already exceeding these figures now?
There are transitional protection schemes in place to allow you to register and protect the entitlement you have accrued before the new rules started on 5 April 2006.
If you receive a share of the ex-spouses pension:
For Pension Credits that are allocated to you as part of a divorce settlement and Pension Sharing Order i.e. if you receive a share of your ex-spouses pension, this will now count towards your Lifetime Allowance.
If you have to give a share of your pension to your ex-spouses:
For Pension Debits that are allocated to your spouse and taken from you and your pension as part of a divorce settlement and Pension Sharing Order i.e. if you lose a share of your pension and give it to your, this will now not count towards your Lifetime Allowance.
Normal Retirement Age - Pension Simplification Laws
Normal retirement age from any pension scheme is now between ages 55 and 75.
It does not matter what sort of pension scheme you have, whether it is a company pension scheme or a private pension or a free standing additional voluntary contribution scheme, you will be allowed to take 25% of the fund as cash, the rest as pension income and all from age 55.
When you decide to retire from your pension scheme you are required to select the type of income you require either Unsecured Income or Secured Income or Alternatively Secured Income.
Early Retirement Age - Pension Simplification
At Retirement - Retirement Ages
Currently you may be able to retire from age 50. However, with effect from 2010 the normal early retirement age, unless on the grounds of serious ill health, the minimum age at which you can retire from your pension scheme increases from 50 to 55.
At the point of retirement you are required to select the type of income you require either Unsecured Income or Secured Income or Alternatively Secured Income.
Postponing or Deferring Retirement - Pension Simplification
At Retirement - Retirement Age - Postponing Retirement
The latest that you can retire and have to take your pension benefits will remain unchanged at age 75.
At this stage you will be required to select the type of income you require either Unsecured Income or Secured Income or if you leave it until you are aged 75 it will have to be Secured Income or Alternatively Secured Income.
At Retirement - Working or Not?
Working or Not? Employment Status - Pension Simplification Laws
You will be allowed to take retirement benefits whether you are still employed or not.
At this stage you will be required to select the type of income you require either Unsecured Income or Secured Income or Alternatively Secured Income.
Ill Health and Early Retirement - Pension Simplification Laws
Lump sums if seriously ill
If you are in serious ill health i.e. have a life expectancy of less than one year, the new rules will allow your pension fund to be commuted to cash and paid out as a lump sum early. The fund will be tested against that year’s Lifetime Allowance. If the fund is below the Lifetime Allowance there will be no tax charge, any fund in excess of the lifetime allowance will be taxed at 55%.
Early retirement on the grounds of ill health
If you are forced to retire early due to incapacity (even if you are below age 55) you will be allowed to retire and withdraw the tax free cash lump sum and take secured income or unsecured pension income in the normal way.
Speak to us today about early retirement due to ill health.
Carry Forward of Unused Pension Tax Relief was finally stopped on 6 April 2006 for all types of pension including older style retirement annuity policies.
This is basically no longer required as people now have huge Annual Allowances that we can pay into pension funds of over £200,000 pa. We are only now limited in how much we can pay into a pension fund by either our yearly salary or by how generous our employers are.
Please read the new rules on Tax Relief and UK Relevant Individuals to check if you will receive relief on pension contributions that you make.
Under the old rules, if you had not been a member of a Company Occupational Pension Scheme whilst working then your income at the time was deemed as "Net Relevant Earnings ". This meant that they were possibly relevant to contributions under a Personal Pension Plan arrangement or a Stakeholder Pension .
If you did not use up your available tax relief, you could carry it forward for up to six years. This has now stopped.
As a general rule, now anyone who is a Relevant UK individual is allowed to make contributions to Stakeholder or Personal Pension Plans if you are potentially liable to pay income tax in the UK, even if you actually do not pay income tax, the Inland Revenue will grant tax relief on contributions that you make.
Previously, if you did not use your contribution allowance then you were allowed to CARRY this FORWARD. You were allowed to carry forward any unused allowance up to a MAXIMUM of 6 YEARS.
THE OLD RULES (Before 5 April 2006):
CARRY FORWARD STOPPED on 5 April 2001 for Personal Pensions and for older style Retirement Annuity Policies on 5 April 2006.
The Welfare Reform and Pensions Act 1999 (with effect the 6 April 2001) stopped the ability to carry forward any unused tax relief allowances and replaced them with Presumption of Earnings Rules and Cessation of Earnings Rules.
Quite simply, if you did not use your allowance in any one year you would lose it. People had to make sure they did not lose any relief that they were entitled to but were allowed to make higher contributions based upon Presumption and Cessation of Earnings Rules.
OLD STAKEHOLDER REGIME RULES: 2001-2006 Rules:
Presumption of Earnings and Cessation of Earnings - Started 6 April 2001 and Ended 5 April 2006:
Presumption of Earnings
You were able to contribute to a plan within the special percentage of salary limits based on your age and salary. However, if you received a higher salary amount in the last 5 years then you could use this as your earnings figure. E.G. A 39 year old was allowed to contribute up to 20% of Net Relevant Earnings (see above). If earnings for that year were £20,000. Then before 6 April 2001, a maximum contribution could be made of 20% i.e. £1,000. After 6 April 2001, if this person earned more in the previous 5 years say £40,000 two years earlier. Then, under the 2001 - 2006 Stakeholder rules, the earnings were allowed to be presumed at £40,000 for pension contributions for 5 years. This meant that under these rules the maximum contribution could be 20% of £40,000 i.e. £2,000.
Presumption of Earnings has now been replaced by the new Annual Allowance.
Cessation of Earnings
If you stopped working or retired you were still allowed to contribute to a pension scheme. Much in the same way as above, you were allowed (at the point you cease working) to choose the best salary from the year that you stopped working or the best of the previous 5 years. You were then allowed to use this salary for the next 5 years and contribute a % of this cessation of earnings figure to a pension based on your age at the start of the tax year. Even when you have no salary at all in the last 5 years you were still be able to contribute under the Stakeholder Rules.
Cessation of Earnings has now been replaced by the rules for Relevant UK Individuals where we can all contribute, even non residents and non workers.
Death Before Retirement - Pension Simplification Laws
If paid out as lump sum
Your estate will receive 100% of the value of the pension fund subject to a maximum of the Lifetime Allowance. If the pension fund is bigger than the Lifetime Allowance, the excess will be subject to a tax charge of 55%.
If paid out as an income to dependents
There will be no tax charge or assessment as above although the dependent will receive the pension income paid out subject to normal income tax assessment and deduction.
Death After Retirement - Pension Simplification Laws
If the pension income is still unsecured (annuity has not been purchased)
Your estate will receive 100% of the value of the pension fund subject to a tax charge deduction of 35%. If the pension income is Alternatively Secured Income at the time of death (i.e. over age 75 and the policyholder has not purchased a guaranteed annuity with the fund but is still drawing from the fund at a reduced rate, the fund must either:
If the pension income is secured (an annuity has been purchased)
If a dependent’s pension was selected as part of the annuity purchase then this will commence and be paid to the dependent on death. If a single life annuity was purchased then all income will cease. No monies will be refunded to the estate.
Secured Pension Annuity Income - Pension Simplification Laws
Secured Income - Annuity Income
At retirement the pension fund is used to pay you a tax free cash lump sum as well as the balance being used to buy a guaranteed income for the rest of your life.
This is known as an annuity.
This is a secured guaranteed income for the rest of your life.
You must secure your income either when you retire from your pension scheme or at age 75 at the latest.
Open Market Option:
You have the right to search the whole market to find an insurance company that will pay the highest annuity income in exchange for your pension fund.
What happens if I do not want to secure my income before age 75? Postpone Retirement or Unsecured Income.
What happens if I do not want to secure my income at age 75 or after age 75? Alternatively Secured Pensions.
Unsecured Pension Income (USP) - Pension Simplification Laws
At retirement most people have built up a pension fund which is used to pay out a tax free cash lump sum with the balance buying a guaranteed income for the rest of your life. This is known as an annuity.
Problems with low annuities rates
If annuity interest rates are low when you reach retirement, if you then buy your annuity you are locking in for life a poor income rate. Many people do not like this. Likewise, for many annuities, if you lock into an annuity and die soon after, the income stops and the pension fund is retained by the annuity company as a windfall for them and bad news for your estate. Many people obviously do not like this and prefer to delay the purchase of their annuity.
Unsecured Income Flexibility - Unsecured Pension Income USP
*** This has now been updated and replaced as Capped and Flexible Drawdown ***
USP was similar and in line with even older rules for “Pension Fund Withdrawal”, you were not forced (and are still not) at retirement to secure your income in retirement by purchasing an annuity.
You are allowed to leave the pension fund invested in a tax efficient area and just draw an unsecured income from the fund.
The minimum income is zero.
The maximum income allowed will be 120% of the regulator’s (the FSA) published single life, level annuity at that time. These maximum income levels must be reviewed every 5 years.
What happens when I reach 75?
At age 75 you were required to either secure your income with an annuity or an “Alternatively Secured Pension”.
Alternatively Secured Pensions (ASP) - Pension Simplification Laws
Alternatively Secured Pensions Explained
If you reached 75 and you had not secured your income, you used be allowed to opt for an Alternatively Secured Pension.
*** ASP has now been replaced by Capped and Flexible Drawdown. ***
What was an Alternatively Secured Pension?
Broadly similar to the unsecured income route, you will be allowed to defer securing the pension annuity purchase and draw an income from the fund.
However, the restriction (i.e the added security level) is that you will allowed to leave the pension fund invested in a tax efficient area but just draw an unsecured income from the fund at a lower level to that available in a pre age 75 unsecured income level environment.
Minimum Income Level
The minimum income used to be zero but was increased in April 2007 to 65% of the regulator’s, the Financial Services Authority's (FSA), published single life, level annuity at that time.
Maximum Income Level
The maximum income allowed used to be 70% but was increased in April 2007 to 90% of the then regulator’s, the Financial Services Authority's (FSA), published single life, level annuity at that time.
Maximum income levels must be reviewed every year.
Inheritance Tax on Alternatively Secured Pension
In addition, new rules were introduced in April 2007:
Alternatively Secured Pensions had a limited role with the exception of those people who have serious health issues or for single people who wish to leave their pension money to a charity, which would still be paid without the tax charges.
Smaller, Trivial, Triviality Pensions
Small Pension Funds
If you have a small pension fund, known as a ‘Trivial’ Pension, you may be allowed to take the whole pension fund as a lump sum removing the need to secure your income with an annuity or take unsecured income.
There are two small pension fund triviality limits.
A. Very Small Pensions - Rules for Small Pension Pots up to £2,000
B. Rules for Trivial Pensions worth over £2,000:
Your total pension fund value (of all pensions funds you have) must be valued at or below 1% of the Lifetime allowance. and you also must be aged over 60.
Please note this is not a figure for each pension fund. If you have one pension fund worth £10,000 and another worth £9,000, you have a total of £19,000 and you are above the triviality limit and cannot have the whole sum as a lump sum.
Therefore, based upon the following Lifetime allowances, the following funds sizes will be considered trivial and able to be taken as lump sum only.
Lifetime Allowance in 2006/2007 of £1,500,000. Trivial Fund Limit of 1% = £15,000.
Lifetime Allowance in 2007/2008 of £1,600,000. Trivial Fund Limit of 1% = £16,000.
Lifetime Allowance in 2008/2009 of £1,650,000. Trivial Fund Limit of 1% = £16,500.
Lifetime Allowance in 2009/2010 of £1,750,000. Trivial Fund Limit of 1% = £17,500.
Lifetime Allowance in 2010/2011 of £1,800,000. Trivial Fund Limit of 1% = £18,000.
Lifetime Allowance for 2011/12 onwards £1,500,000 but Trivial Fund Limit held at 1% of old lifetime allowance = £18,000.
Taxation When Taking Trivial Pensions
If Trivial Pensions are taken as lump sums: 25% of the fund will be paid as a tax free cash lump sum and 75% of the fund will be paid as a lump sum subject to a deduction for income tax.
Final Salary Pension Annual and Lifetime Allowance
How do you value a pension scheme that has no “value” e.g. a Final Salary Pension Scheme for lifetime allowances and annual allowances?
Annual Allowance Comparisons:
The yearly allowance assumptions that most people will be able to pay each year into their pension scheme is as follows:
However, for a final salary scheme, there is no ongoing “fund value” only a guaranteed income and tax free cash amount in retirement.
2010/11 and before a factor of £10 per £1 p.a. increase in the benefits from a pension scheme has to be used.
2011/12 and onwards a factor of £16 per £1 p.a. increase in the benefits from a pension scheme has to be used.
Other pensions: You are still free to make additional contributions, up to the Annual Allowance threshold, to any other type of pension scheme.
Lifetime Allowance Comparisons:
The lifetime value limits are currently set as follows:
If you exceed these limits you face a tax charge, unless you have lifetime allowance protection - contact us for lifetime allowance advice
However, for a final salary scheme, there is no “fund value” only a guaranteed income and tax free cash amount in retirement.
Value Final Salary Scheme for Lifetime Allowance When Being Paid As Pension Income?
Lifetime Allowance: Valuing Pensions That Will Be Paid After 6 April 2006
Pensions schemes not yet being paid out on or before 6 April 2006 are valued after the 6 April 2006 for lifetime allowance calculations at £20 per £1 pa pension.
E.g. If you an accrued pension due to you of £15,000 pa. The equivalent Lifetime Allowance will be £20 X £15,000 i.e. £300,000 which is well below the Lifetime Allowance figures. Any increases in pension payments e.g. the pension is inflation linked will also have these increases factored into the Lifetime Allowance threshold at £20 per £1 pa increase.
Lifetime Allowance: Valuing Pensions Already Being Paid Before 6 April 2006
Pensions already being paid out on or before 6 April 2006 are valued after the 6 April 2006 for lifetime allowance calculations at £25 per £1 pa pension.
E.g. If you have pension payments of £15,000 pa. The equivalent Lifetime Allowance will be £25 X £15,000 i.e. £375,000 which is well below the Lifetime Allowance figures. Any increases in pension payments e.g. the pension is inflation linked will also have these increases factored into the Lifetime Allowance threshold at £20 per £1 pa increase.
You are still free to receive and have made contributions, up to the Lifetime Allowance threshold, to and from any other type of pension scheme.
Use your allowances and save money on your pension, book a pension review and learn how your pension could gain you money.
Pension Tax Relief 2011
Pension Tax Relief Maximum Contribution £50,000
Annual Allowance 2011 - (Maximum Pension Contribution Per Year)
Pension Lifetime Allowance 2012 - (Maximum Pension Fund in Total For Life)
Old 2009 and 2010 Pension Tax Relief Rules - Now Replaced
Contact us today for up to date advice from UK winner pensions adviser.