Pensions – Guide to the April 2011 changes
Pensions are under pressure as the dream of a financially comfortable retirement evaporates for millions.
Several key changes to pensions have changed life expectations for many who expected to have enough cash to fund giving up work.
Now, almost everyone will have to review their pension arrangements, and for many, it’s back to the drawing board.
This guide looks at the changes to pension rules that took effect from April 6, 2011:
Pensions tax relief capped at £50,000
This is an anti-avoidance measure aimed at higher rate taxpayers converting salaries or bonus payments taxed at 40% or more in to tax-relieved pension contributions.
The limit last year was £225,000.
Middle earners can still make extra contributions by carrying forward unused contributions from earlier years.
Rules about buying annuities scrapped
No one has to buy an annuity. Instead, pension cash can stay invested for draw down.
Flexible drawdown is offered to savers with large pension funds who have other income of £20,000 or more a year. They can draw done all or part of their fund as they deem fit.
Capped drawdown is for the rest, who can drawdown the same amount as an annuity would pay. Annuity rates are around 6%, giving a £6,000 income from a £100,000 pension fund.
Inherited pensions taxed at 55%
Wealthy pension savers who do not draw on their fund can pass the cash on to their family or loved ones when they die – generally in one of three ways:
- If you die before 75 and draw no benefits, the fund is passed on free of tax.
- If you die after age 75 before drawing benefits, the pension is taxed at 55%.
- If you die at any age and have drawn pension benefits, the fund can be paid as a lump sum less tax at 55%. If there are no dependents, the cash can go to charity without tax.
Default Retirement Age abolished
The default retirement age of 65 years old no longer applies and you can work on until whatever age you wish.
Index linking switched from RPI to CPI
Public sector pensions are linked to the consumer prices index rather than the retail prices index, which rises faster because the figures include housing costs.
New proposed flat rate State pension
State pension rules could be changed from a basic pension pension topped up with means tested benefits and pension credits to a flat-rate £140 per week payment for everyone.