UK Pensions A-Day AND WHAT IT MEANS TO YOU

6 April 2006 was A-Day, the date at which the British government bought in sweeping changes to the pension system.

These changes affected anyone with a personal or company pension.

The idea was to simplify the hugely complex system for UK personal and company pensions.

And to relax the rules governing how much and how we pay money into pension schemes.

The new rules apply to all personal and employer paid pensions, bringing them all into line for the first time.

Pensions A-Day removed limits to the amount you can pay into a pension scheme but with these restrictions on the amount of tax-free payments you can make:

There is a maximum amount you can pay in tax-free each year. (From 2006 this was £215,000 rising to £255,000 by 2010).

If you pay in more than this you'll be taxed at 40% on the extra.

There is also a maximum amount you can pay in during your lifetime.

In 2006 this was £1.5m, (rising to £1.8m by 2010). If you exceed this amount you is taxed at 25% on the excess as you withdraw it (or at a huge 55% if you withdraw a lump sum).

The new rules make saving in pension schemes more flexible.

It is now easier to save in more than one scheme.

It is easier to mix personal and employer paid scheme than before.

Originally the government said they would allow investments including residential property and holiday homes or even more exotic investments such as wine and art.

However, because of fears that the system would be abused they changed their minds in a highly controversial - almost unprecedented - manner. (A lot of people had spent time and money on getting things ready for these promised changes. They were not ammused when the UK Treasury changed its mind).

However there are still many opportunities for flexible investment.

Pensions A-Day provided alternatives to taking your pension as an annuity.

You are now able to

• Invest in a pension scheme - secure for life
  
  
• Invest in an annuity providing a regular income
  
  
• Draw income directly from your pension (an unsecured pension) up to age 75
  
  
• Draw income directly from your pension as an 'alternately secured pension) up to age 75

The Alternatively Secured Pension (ASV) allows you to retain your interest free nest egg whilst drawing up to 70% of that paid by an annuity. You can then withdraw the lump sum when needed or pass it on to a dependent.

Pensions A-Day changed the way that you can draw your pension and the date at which you can receive the benefits.

You are now able to draw part of your pension from a company scheme when you are still working full or part time for the same employer.

All pension schemes now offer tax-free lump sums of up to a quarter of your pension so long as this is less than 25% of your lifetime allowance.

From 2010 the minimum age for receiving your pension will rise from 50 - 55.

For women the age will rise gradually from 60-65 between 2010 and 2020.

Conclusion

Most of the changes that came into effect in 2006 should be beneficial to the majority of personal or company pension holders.

The limits for investing are higher than most people would expect to pay - if you're rich enough to have built up a nest egg of 1.5m you've probably got a pretty good team of accountants to sort all this out for you!

The increased flexibility offered by the new types of pension investment may be a boon for even the moderately well off. However, as with all these changes, advice should be taken before venturing your savings in any investment.

The change that certainly affected everyone was the change to the age at which we can draw our pension.

Read Our Full UK Pensions Guide