Post-April 2006 Pension Contracts

On 6 April 2006, known as A-Day, new pensions legislation was introduced which completely replaced all the pension regimes in place prior to that day. Although there are several different types of pension scheme, the rules which apply to contributions and benefits are now virtually the same across all types of registered pension scheme.

All pension schemes must be Registered Pensions Schemes, and contributions are controlled by two allowances:-

Annual Allowance
Lifetime Allowance

Annual Allowance

The Annual Allowance is defined as the total contribution which can be made in any one year on which tax relief may be obtained. In the current tax year (2010/11), this has been set at £255,000 gross. For pensions provided on a Defined Benefit basis, the value of benefits accrued each year will be translated into a notional fund, which is then used to assess your position in respect to the Annual Allowance.

If your earnings are less than the Annual Allowance, then you will get tax relief on the total contributions made up to a maximum of 100% of earnings.

If you have no earnings, then tax relief is always applicable to the first £3,600 gross of any contribution.

You can contribute more than the Annual Allowance, but any excess will be taxed at 40%. If you still wish to contribute more than the Annual Allowance, it is essential that you discuss this with your Financial Adviser first.

It is possible to make contributions on behalf of third parties. For the purpose of tax relief, these contributions are treated as having come from the scheme member. This offers the opportunity for people to fund their spouse’s and dependents’ pensions.

Lifetime Allowance

The Lifetime Allowance is defined as the aggregate limit of all your pension savings. In the current tax year (2010/11), this is £1,800,000, but this allowance will be increased each year. For pensions provided on a Defined Benefit basis, the value of benefits will be translated into a notional fund, which is then used to assess your position in respect to the Lifetime Allowance.

For those individuals who have accrued, prior to A-Day, pension provision which is already above or close to the Lifetime Allowance, the Government included transitional protection within the new legislation. In order to register for transitional protection, you must complete the Protection of existing rights form. This form must reach HM Revenue and Customs before 5 April 2009. If you are in this position, you should contact your Financial Adviser urgently.

Your pension savings can build to any size, but the excess will be taxed when you take the benefits. Currently, if any of the excess fund is taken as pension income, then tax at 25% will be deducted before any income is paid. The remaining fund is used to provide an income, which is subject to income tax in the usual way. Also, if any of the excess fund is taken as a lump sum, then 55% will be deducted before the lump sum is paid out.

For more information, please contact us.