Retirement Planning

The law on pensions changed in April 2006 making it possible for almost everyone to put much more away towards their retirement than previously. The new rules mean that:

Most people – even those with no earnings - can invest up to £2,808 every year in a pension and the government will add £792, topping up the value to £3,600 a year (from April 2008, this will be an investment of £2,880 a year, topped up by £720, as the basic rate of tax falls from 22p to 20%;

• Those with UK earnings from trade, profession or employment can top this up to entire earnings for the year (up to an annual allowance set at £225,000 for 2007/8, £235,000 for 2008/9 and rising thereafter) and receive tax relief at their highest marginal rate. (Contributions above these levels are possible, but do not attract tax relief).
• Employers can top up personal contributions to the same annual allowances, even if this exceeds the individual’s salary, although tax relief is at the discretion of the local inspector of taxes. (Any contributions above the annual allowance by an employer incur severe financial penalties).
• Anyone can build up a pension fund up to the lifetime allowance (set at £1.6 million for 2007/8, £1.65 million for 2008/9 and increasing thereafter) but higher funds are subject to a tax of 55% (unless protection* has been applied for and granted).
• Everyone is entitled to take 25% of their total pension fund as a lump sum (currently free of tax) and the balance of the fund can be used to purchase an annuity, or an income drawn directly from the fund (this income can be as little as nil).
• It is also now possible to take pension benefits (at any time after age 50 – rising to 55 on 6th April 2010) and continue to carry on working for the same company in the same capacity.

* Those with funds in excess of £1.5 million on 6th April 2006 have until 5th April 2009 to apply for “Primary Protection” against the lifetime allowance charge. This creates a personal lifetime allowance, which increases at the same rate as the ordinary lifetime allowance.

Those with smaller (or larger) funds on 6th April 2006 have until 5th April 2009 to apply for “Enhanced Protection”, which means that however much their fund grows, they will not be subject to the lifetime allowance charge. However, they must never (from 6th April 2006) make a pension contribution, or the protection is automatically lost.