the pension tax rules in detail

Back on the 6th April 2006 ( known sometimes as 'A Day' ) major changes were introduced to the structure of UK Pension schemes.

Many changes were introduced, some of the main ones are as follows:-

The introduction of a Lifetime Allowance
Each member of a pension scheme now has a maximum permitted tax-exempt 'fund' at retirement. This Lifetime Allowance is currently £1.8 million per person (2010/2011 tax year),

If your total fund value, including every pension you hold, is worth more than £1.8 million (2010 / 2011 ) when you retire, then you will have to pay tax of up to 55% on any value above this lifetime limit. Any money your employer pays into your pension will count toward these limits.

Pension Contributions and the Annual Allowance
Previously, your pension contributions would have been limited to a percentage of your earnings, now there’s one rule for all, which is of particular assistance to people in the 20 to 40 age bracket that may have put off investing in a pension. These groups can now put in larger sums later, instead of saving modestly, without being penalised for doing so. Remember, however, that the benefits of saving early can be substantial.

You can now invest and receive tax relief on up to 100% of your earnings, or £3,600 whichever is higher.

There is an annual pension 'input' allowance, (known as the Annual Allowance) set at £255,000 for the 2010/2011 tax year, for all pension schemes.

If you pay in more than £255,000 (2010 / 2011 tax year) then you will have to pay tax on any payments over that amount. This includes Employer and Third Party contributions.

Pension Commencement Lump Sum ( thats Tax free Cash to you and me..)
The maximum pension commencement lump sum (Tax Free Cash) from any pension arrangement is 25% of the value of the pension rights.

Transitional provisions may apply in respect of pre 'A Day' entitlement.

Retirement Age
The concept of a normal retirement age is less definite than it was in the past. Members of pension schemes can now choose (within certain age ranges) when to take their benefits, making the process of retiring more flexible. The minimum age for drawing benefits rose from 50 to 55 years with effect from 6th April 2010,

Death Benefits
The maximum tax-free lump sum death benefit is simply equal to the lifetime allowance, so currently this will be £1.8 million.

( There are transitional provisions for pre 'A Day' pensions entitlement made in respect to some of these key areas of planning and, in respect to over-funding, the government have introduced some tax charges. )