Ritson Smith hot topic: Pensions – increased scope for savings following “A” day

 
The following article has been prepared by David Dowell, senior tax manager with Aberdeen-based accountancy practice Ritson Smith.

From 6 April 2006, new pension simplification rules came into effect of which one highly significant feature is the abolition of the old limits on how much taxpayers can save each year in a pension fund and enjoy tax relief on the contributions.

Under the pre ‘A’ day rules, final salary schemes had a top level of contributions of 15% of income, with higher limits for personal pensions.  From 6 April 2006, a taxpayer can contribute up to 100% of his/her annual salary (subject to a current maximum of £215,000) each year whilst obtaining tax relief on the contributions.  Even an inheritance can be used this way.

Taken to its extreme, this could enable someone to live off his/her savings (if sufficient) for a year and put 100% of their salary into a pension fund during that period.  This might be particularly useful in the final year before retirement where as much as possible could be put into the pension fund, with tax relief gained on the way in.  It would then be perfectly feasible to take 25% of the total pension savings as a tax-free lump sum a year later (ie. in the year of retirement).

Another possibility is to gain the benefit of the tax-free lump sum at an earlier age.  Contributions could cease to be made to a personal pension at the age of 55 and the pension plan put into income drawdown (known as “unsecured income”).  The income remains invested and, although some of the accumulated fund should be drawn down as a monthly income, it is possible to defer taking any income until the age of 75.  

Furthermore, this could also be done while continuing to work and making contributions to a separate employer’s pension scheme.

In these ways, new opportunities now exist for taxpayers to increase the amount of savings they put into their pension funds whilst using the available opportunities more effectively.

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