Pensions Act 2004
There are some substantial changes taking place at the moment
in the pensions arena, particularly in terms of pension funding levels. You
need to be aware of these changes, and how you may benefit. The term used
for these changes is Simplification.
From the 6th of April 2006, this new legislation will come into being.
A major change will be the date at which you can retire. At the moment, benefits
from your pension can be taken from age 50 (apart from protected rights).
The government has provided the new legislation in order to raise the minimum
retirement age from age 50 to age 55, with a transitional period running out
in 2010.
Those having existing contractual rights to retire before age 55 are to be
allowed to do so under the new transitional arrangements. Benefits must be
set up for payment no later than 75.
Protected Rights are set to change. The DWP (Dept of Work & Pensions)
have proposed that tax free cash should be made available out of protected
rights policies, with the requirement for escalation on pensions in payment
removed.
Another interesting change will affect those who don’t have large pension
funds. If an individual’s total pension savings (including any pensions
in payment) are valued at no more than 1% (£15,000 in 2006/07) of the
annual lifetime allowance then they will be able to take all their fund as
cash (subject to a tax charge on the excess over the tax free cash entitlement).
Currently, you have to have a smaller fund than this to be able to commute
on the grounds of triviality and this might become a preferred options for
those with small funds. After the 6th April 2006 the retirement options will
be Secured Income, Unsecured Income and Alternatively Secured Income (ASI).
Secured income will be the income that you derive from your pensions scheme
or purchase of an annuity. Unsecured Income will be similar to Pension Fund
Withdrawal option currently offered under personal pensions as well as rolling
5 year annuities. ASI will be available from age 75 as a new concept aimed
at individuals who choose not to participate in the pooling effects of annuities.
The Unsecured Income option will have some major differences to pension fund
withdrawal in as much as there will be no need to take a minimum income (subject
to provider or Department of Work & Pension requirements). The maximum
income will be determined with reference to new guidelines which will be prescribed
by the Inland Revenue. Both Secured Income and Alternative Secured Income
options must be purchased from age 75.
The new legislation is going to offer more choice for individuals in retirement
and it is even more important that you seek advice on these options so that
you can appreciate the advantages and also be aware of the potential pitfalls
that might lie behind them. These include issues such as risk tolerance and
investment advice and also relate to the practicalities of needing on going
advice as you go through retirement.
