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Please note this information sheet has now been superseded by various changes to the UK pensions regime in April 2015.

The UK pensions regime was radically reformed on 6th April 2006 – a date known as A-Day. On that date, the 8 sets of rules that previously governed the various types of pension plans were scrapped and consolidated into one set of rules for all pensions. The old rules restricting pension contributions according to your age and net relevant earnings have now gone. Instead, you can now invest up to 100% of your annual UK earnings. Not only that, but your employer can pay contributions into your pension plan over and above your earnings, although there will be no Government top-up on these.

Contribution Limits
There is now an annual limit of £50,000 for pension contributions (going down to £40,000 from April 2014) and a lifetime limit of £1.5 million (going down to £1.25 million from April 2014). These limits are not just for your own personal contributions but also include any employer contributions. Any contributions in excess of the annual allowance will be taxed at your highest marginal rate, ie 50% if you earn more than £150,000 (going down to 45% from April 2013). If you exceed the lifetime limit, you have a choice. You can either pay a one-off 25% tax charge on the excess and then take the balance as pension subject to the usual income tax rules, or you can take the excess as a lump sum and pay a one-off tax bill of  55%. These limits also apply to final salary employer schemes. If the increase in the pension fund during the tax year (as calculated according to a standard formula) exceeds the annual allowance, you will have to pay tax on the excess. They are also subject to the above tax rules on the lifetime limit. The only good news for people with large pension funds is that the Government is considering a "personalised protection scheme" so that retrospective tax charges will not apply.

If you do not have any UK earnings, you are still allowed to contribute up to £3,600 a year to a stakeholder pension and still get the tax benefits. These are very popular as charges must be legally capped at 1.5% per annum for the first 10 years and 1% thereafter. Also, there are no penalties if the owner chooses to stop contributing or transfers the fund elsewhere, and the minimum payment cannot be set higher than £20. Stakeholders are often sponsored by employers who must make a pension scheme available to their staff if they employ 5 or more people.

Tax relief
Tax relief is given by paying your contributions net of basic rate tax and the pension provider claiming the tax credit from the Government. For example, if you pay £2,880 into your pension the tax credit will be £720 so your gross contribution will be £3,600. If you are a higher rate taxpayer you can claim another 20% on the lower of your gross contribution or however much your taxable income exceeds the higher rate threshold. You can either do this on your tax return or by writing to your tax office.

Employer contributions
Employer contributions are not restricted by your earnings so if you run your own business you could make company contributions for as much as you like up to your annual allowance and lifetime limit. However, employer contributions must be made wholly and exclusively for the purpose of the business, and if they are exceptionally large you may be forced to spread the corporation tax relief over 5 years. Fortunately, this only applies to employer contributions at least £500,000 higher and more than 210% of the contributions in the previous period. Employer contributions can be very tax efficient when used as part of a salary sacrifice scheme, as employees will benefit from higher gross contributions whilst taking home exactly the same money after tax and NI as they would under a net pay arrangement. If any contributions made by your employer exceed the annual allowance (after deducting your own contributions) you will have to pay tax on the excess at your highest marginal rate. However, it is worth noting that the annual allowance will not apply in the same year in which benefits are taken in full, so this could enable you to take advantage of any unused portion of your lifetime limit.

Retirement Benefits
Changes have also been made to the way income can be drawn from pensions. Retirement benefits can now be taken from the age of 50 (or 55 from 6th April 2010) apart from a few special exceptions such as people who retire early due to ill health who are allowed to draw their pensions early. As before, a 25% tax free lump sum (the commutation) can be taken on retirement age (subject to a cap of 25% of the lifetime limit) and if this tax free amount is invested in an annuity, only 20% of the income produced by the annuity will be taxed. Since A-Day the 25% tax free lump sum is also possible for AVCs (Additional Voluntary Contributions). Previously, the whole of the fund on AVCs had to be used to purchase an annuity.

Also as before, you are allowed to defer investing the fund in an annuity until you are aged 75. However, this age limit has now been removed for those who do not wish to purchase an annuity. Anyone aged over 75 must instead either purchase lifetime annuities or transfer their existing arrangement to an Alternatively Secured Pension (ASP). These were designed for people who have a principled religious objection to pooling mortality risk and impose a minimum income requirement of 65% and a maximum of 90% based on annuity tables produced each year by the Government Actuaries Department. However, it soon became clear that ASPs were being used as a way of transferring retirement benefits to family members and avoiding Inheritance Tax, so from 6th April 2007 all surplus funds in an ASP on the death of the member are treated as unauthorised payments and subjected to a tax charge of up to 70% unless they are paid to a spouse, a civil partner, a charity or a financial dependant.

If you choose not to purchase an annuity on retirement, you can opt for a drawdown arrangement. These have become more flexible since A-Day. Previously the amount of income you could withdraw from your pension fund was restricted to 100% of a single life annuity based on tables produced by the Government Actuaries Department. The minimum withdrawal was 35%. Now you can withdraw between zero and 120% of a comparable single life annuity. Where death occurs before the individual's 75th birthday, the remaining fund is paid to the beneficiaries less a 35% tax charge.

Self Invested Personal Pensions (SIPPs) have become more popular in recent years due mainly to a fall in the cost of running them. They allow investors to choose the kind of products their pension is invested in, some of which are not available to traditional pension funds. For example, residential property can be included in a SIPP, provided it is bought by a syndicate of at least 10 people, none of whom are related or use the property themselves. Buy-to-let homes or holiday homes cannot therefore be invested in a SIPP. However, it is possible to invest directly in commercial property used by your own business provided it pays a market value rent to the SIPP. You can also borrow up to 50% of the fund’s value to buy commercial property, so a fund of £100,000 could be used to buy a property worth £150,000. However, it can be very risky investing your pension in commercial property so you should be cautious about doing this and seek professional advice.

Small self-administered pension schemes (SSAS) are suitable for smaller companies where the members are usually directors or senior staff. They can have a maximum of 12 members, one of whom must be a Revenue approved Pensioneer Trustee who ensures that the investment regulations and tax approval requirements are adhered to. The SSAS is set up by a trust deed and allows the members greater flexibility over the assets in the scheme. The SSAS can invest in the shares of the employer companies but cannot own more than 20% in total or 5% individually. It can also borrow up to three times its ordinary annual contribution plus 45% of any existing assets.

Pensions are a very tax efficient way of saving for your retirement as they allow you to claim relief at the higher rate (apart from those people unlucky enough to earn more than £150,000 per annum) and you can boost your contributions even more by taking advantage of a salary sacrifice scheme. However, a low life expectancy or reduced annuity rates may make pensions unattractive to some people as once you have bought an annuity you lose the accumulated fund for good. Deferring it until you are aged 75 may be a good idea if you do not expect to live that long and want to leave what is left in your pension pot to your dependants, but it will suffer a 35% tax charge. Normally it is a bad idea to do this because you will forego several years of income from an annuity and, when you do finally buy one, the growth of the fund plus higher annuity rates may not be enough to make up for the income you have lost. However, it is a useful option if you have sufficient income to live on from other sources such as an occupational pension and you expect your fund to perform well for the next few years. You may also wish to limit the income from your pension fund in the early years, especially if you are still working, in order to avoid incurring income tax unnecessarily.

In summary, pensions are excellent savings vehicles if you want a guaranteed income when you retire, but if you prefer to invest in other ways, such as buy-to-let residential property, and dispose of your capital as and when you see fit, leaving what is left for your chosen beneficiaries, then you may prefer alternative methods of saving for your old age.

Acumen Tax Solutions
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 8406 9425 Mobile: 07813 582890 E-mail:

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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