A-Day was the popular name given to 6 April 2006, the starting date for the unifying rules for all occupational and personal pension schemes registered as qualifying for tax relief.
Non-registered pension schemes may continue, but without any tax advantages.
Under the A Day rules there is no limit to the number of schemes an individual may belong to. Most of the contribution restrictions will be replaced by two overall key controls:
Annual allowance (AA)
Annual contributions up to the level of earnings (or £3,600 gross if greater) attract tax relief. Contributions above these levels do not receive any relief and there is a tax charge of 40% to the extent that the increase in pensions savings in a tax year exceeds the AA.
Lifetime allowance (LTA)
This is taken into account whenever benefits are withdrawn. At the first withdrawal, any funds used in excess of the LTA are taxed at 25% to the extent that they are used to buy a pension or 55% in the case of lump sum payments.
LTA and AA controls are reviewed every five years. The levels for the first five years have been set as follows:
|Tax Year||Annual Allowance (£)||Lifetime Allowance (£)|
One of the features of the new system is the lifting of restrictions on types of investment, and it will be possible for registered pension schemes to invest in more or less anything.
However, it was announced in the Pre-Budget Report that the Government would remove the tax advantages where self-directed pension schemes invest in residential property or certain other assets such as fine wines, classic cars and art & antiques. This is to prevent people benefiting from tax relief in relation to contributions made for the purpose of funding purchases of holiday or second homes and other prohibited assets for their or their family's personal use. Borrowing by schemes to increase investments is limited to 50% of the fund.
In certain circumstances the pre A-Day limit may be considerably higher, so there could be scope for timely tax planning.
Tax free lump sums
All schemes have the ability to offer members a tax free lump sum of up to 25% of their pension fund (limited by the LTA).
The minimum age for drawing benefits increases from 50 to 55 by April 2010, although people in schemes with early retirement dates maintain their rights to draw benefits early. It is not be necessary to retire before benefits can be drawn.
Benefits must be crystallised by age 75. Someone in a money purchase scheme who does not wish to buy an annuity may instead withdraw income from the pension fund, with special provisions for passing on the fund following the death of the member. This new category of Alternatively Secured Pensions was originally intended for those with religious objections to risk pooling. The Government will monitor the situation to ensure that such pensions are not being used for tax avoidance.
Employers will be able to claim tax relief for contributions paid to a registered pension scheme. Exceptionally large contributions will be spread over 2 to 4 years.
The complex approval process for pension schemes is replaced by a simplified regime requiring registration only. Schemes that were approved schemes before A-Day automatically become registered schemes.
Transitional arrangements protect pre A-Day pension rights (including rights to lump sum payments).
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