Wake Up to the New Pension Rules
MoneyWise Autumn 2006
Pension planning was revolutionised earlier this year, but many people have still not woken up to the new opportunities, let alone started to make use of them. About six months have now passed since the largest pension reform for many years occurred. Gone are all the confusing limits on contributions and benefits that varied between different types of pension. Gone to are many of the complexities and anomalies that accumulated as successive rules and regulations built up.
Although it is still early days for the new regime, a number of themes are beginning to emerge:
- Interest in self-invested personal pensions (SIPPs) has grown dramatically over the last year. The era when you were limited to a choice of a couple of dozen funds for your pension plan is over. Now you can choose virtually any fund, whether onshore or offshore, for your pension.
- Some people have started to save on the cost of basic life cover by moving from traditional term assurance to pension term assurance, which gives you full income tax relief on your premiums.
- The increased contribution flexibility has encouraged employees to take a new approach to the timing and level of their pension contributions. It is now much simpler to turn your taxed bonus into a tax relieved pension contribution. And the earlier you make pension contributions, the more scope there is for them to grow.
- Employees nearing retirement are increasingly finding they can draw more tax-free cash from their pension. Under the new rules, you are generally allowed to take 25% of the value of your retirement benefits as a lump sum, free of tax, provided that the scheme rules have been appropriately amended. This can be a significant increase – more than double in some cases. Of course, the corollary of a higher cash sum is a lower pension.
- The new alternatively secured pension (ASP), which gives you the opportunity to avoid ever having to buy an annuity, has attracted considerable attention. However, to date only a few people have reached the age 75 threshold at which this restricted form of pension fund withdrawal becomes available.
One aspect of pension planning has not changed at all: the need for expert advice. The rules are undoubtedly simpler, but they are not suited to a DIY approach. If you want to make the most of the new regime, you need to start by talking to us.