PENSION RULES – A SUMMARY

Current pension options and regulations in 2011/2012:

1. You can contribute into a pension an amount equivalent to 100% of your earnings up to a maximum of £50,000 in any one year. If you want to contribute more, then you are allowed to bring forward any unused amounts of potential contribution from the previous 2 years. For each £1.00 you contribute, the Government adds 25p if you are a Basic Rate Taxpayer. If you are earning over £42,575, you end up getting 50p benefit for each £1.00 you contribute. Those earning over £150,000 get still more tax relief.
2. From 2012 the maximum total pension you are allowed to have had tax relief on in your working life is being reduced from £1.8 million this year to £1.5 million from 2012 onwards.
3. You no longer have to purchase an annuity (an income for life) by age 75. There is now no age limit.
4. From age 55 onwards you can take up to 25% of your pension savings as Tax-Free Cash and take your other pension benefits. You have a number of options for taking the other benefits such as the following:
a) You can take your Tax Free Cash and use the remainder to buy a guaranteed lifetime annuity (an income guaranteed for life).
b) You can take your Tax Free Cash and leave the remainder invested and draw an income from the invested funds – up to a maximum set by the Government. This is called a Capped Income Drawdown.
c) You can take your Tax Free Cash and leave the remainder invested and take out as much as you want as long as you have a guaranteed pension income of at least £20,000. This is called a Flexible Drawdown.
d) You can take your Tax Free Cash and use the remainder to buy a Temporary Annuity which gives you an income usually for 5 years and then you have the option to choose again how to use the remaining pension fund.
5. If you die and have not taken any pension benefits from your pensions, the value of the pension becomes part of your estate and is shared out according to your Will.
6. If you die and have started taking pension benefits, your estate will receive 45% of what is left in the fund with the Government taking 55%.
7. From 2012 people who contracted out of SERPS (State Earnings Related Pension Scheme now called the State Second Pension) many years ago will no longer receive an annual amount paid into their pension by the Government. Instead they will be credited with a year of contribution to the State Second Pension (this will increase the total State Pension one receives at State Retirement Age).