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Major Changes to Pension Regulations in 2011

As you may be aware, there are significant changes being made to rules regarding how much you can save into your pension and how you can eventually take your benefits. Perhaps the most significant change is the removal of the need to buy an annuity by the age of 75 and the greater choice this gives you in how you secure your retirement income and what happens to the fund on your death.

From April 6th, the maximum amount that you can save into your pension and receive tax relief will be £50,000. Any employer contributions will also have to be included in this amount. Whilst this level of allowance will be more than sufficient for most people, you are able to carry forward any unused allowance from the previous three tax years to boost the amount on which you can receive tax relief.

Tax relief on your contributions will be at your marginal rate of income tax and so additional rate tax payers may be able to receive 50% tax relief. If you have taxable income of more than £100,000 then the tax savings can be even more significant. Individuals on this level of income lose £1 of personal allowance for every £2 earned over £100,000 resulting in tax rates of up to 60%. Making a pension contribution reduces your taxable income and potentially saves you from these higher rates of tax.

Don’t forget that basic rate tax relief is given on contributions even if the contribution takes your taxable income below the personal allowance. This can be useful where one partner is a low earner but you wish to build up their pension fund in order to fully use their tax allowances in retirement.

The current rule which pretty much forced you to by an annuity by age 75 or face punitive tax charges on your fund on death is being removed. You now have a broad range of options for securing your benefits in retirement including short term annuities, income drawdown, asset backed annuities as well as the traditional lifetime annuity with no cut off age. These options can be used in isolation or combined to provide you with the income guarantees and flexibility that meet your needs. Depending on your selected option, in most cases the fund can be passed on to your family even if you have no dependants at the time of death. The fund would be taxed at a rate of 55% but the risk of also paying additional inheritance tax on the benefit has effectively been removed.

Income drawdown has been an option for a number of years allowing individuals flexibility in the level of income they withdraw within specified limits. Although the maximum permitted income withdrawal is being reduced, it will remain an option worth considering for larger pension funds or if you have significant other resources and require the flexibility it offers. Withdrawals above the reduced limits will be permitted through a new option called Flexible Drawdown. If you have a minimum guaranteed lifetime income of at least £20,000 (including State benefits) then you can make unlimited taxable withdrawals from your pension fund.

When considering funding for your retirement, remember that the State pension age (SPA) is set to rise to age 66 for both men and women by 2020. The process will be gradual, beginning in December 2018. Before this starts, women’s SPA must first come into line with men’s SPA. This increase, which has already started, was originally planned to gradually occur between 2010 and 2020 but will now be accelerated bringing women’s SPA to 65 by December 2018. State benefits will now be paid later than expected for anyone under age 57 as at 6^th April 2010.


For pension advice visit The Financial Planning Partners Ltd.