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All Change For Pensions
A pension plan is a long-term investment - the only certainty is that the rules will change several times before you see any return. There was a big shake-up in 1988, and another in 2001; now there will be a further major change in April 2006. It comes with the usual claim to be a 'simplification of the rules' - to be fair, it is a genuine attempt to make things simpler, but pension schemes are so varied and complicated that the end result is still not very straightforward.
The main headline change is that all tax-favoured pension schemes will have a single upper limit for tax relief, instead of the different limits that currently apply to benefits from employee schemes and contributions to personal pensions - from April 2006, you are not supposed to save more than £1.5m by the time you retire. You may think that this would be a nice problem to have, but certainly those who do have substantial accrued funds - or a final salary scheme that is likely to pay them more than £75,000 a year - should take advice early about how the new rules will affect them.
The new regime will also not allow any retirement dates earlier than 50 (and that will move up to 55 in 2010). Up to now, certain activities have been recognised by the Revenue as having an earlier retirement date (e.g. professional sports players). Again, anyone who was expecting to retire earlier than 50 under these rules needs to take advice - if you are already in a scheme, you may be able to keep the entitlement.
For everyone else, the big change will be to how much you can invest in pension schemes. For most, it will increase the amount you can put in year by year. For all the bad press caused by market falls and Equitable Life, the tax relief on pension plans is still a good deal, and many people still try to put in as much as they can. We can advise you about the effect of the upcoming changes on you and your savings.
The changes to pensions are too many and detailed to cover in this brief summary. A large part of the Finance Act 2004 is devoted to completely rewriting the rules. Some things remain the same, or at least familiar - for example, the ability to take a tax-free lump sum on retirement, and the requirement to take a pension or an annuity by the age of 75 - but many things are completely different, particularly in relation to the amounts that individuals and their employers can contribute to schemes. In many cases, it will be possible to put more into a tax-sheltered scheme earlier.
What is certain is that anyone who is interested in pensions will need to grow familiar with the rules over the next year and a half, and those people who could be adversely affected - those with very large funds, or with current retirement ages below 50 - will need to take action. |
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