One of the biggest changes ever made to the UK pensions system took place on 6 April 2006 ? designated A-Day by Her Majesty's Revenue and Customs (HMRC). The process was described as 'simplification' of the tax rules, and in many respects the description is accurate. But a number of aspects of the new regime are very complicated, in particular the transitional or changeover provisions as they apply to people with relatively substantial pension rights.

The main tax privileges long enjoyed by pensions have broadly remained in place:

• Contributions into pensions by employers, employees and self-employed people continue to qualify for full tax relief.
• The funds are free of tax on capital gains and investment income, apart from the tax credit on UK dividends, which are non-reclaimable.
• Retirement benefits remain available in part as a tax-free capital sum and in part as a taxable lifetime income.

The legislation is contained in the 2004, 2005, 2006 and 2007 Finance Acts and a raft of regulations. While more legislation may appear in next year's Finance Act, this will probably only involve minor technical issues.

Anyone accruing pension benefits ? and even a number of those already drawing them ? should look at their position in the light of these major changes. It is important to get competent professional advice because of the complexities involved.

Allowances

You can now contribute up to 100% of your earnings. Your employer may be able to contribute more and the overall annual allowance is £225,000 in 2007/08, although this will rise in later years. Even if you have no earnings, you can still invest £3,600 a year and receive on that contribution tax relief. Everyone now has a maximum permitted tax-exempt fund. This is called the lifetime allowance and currently lies at £1,600,000 for the 2007/08 tax year and is again likely to increase in later years.

Contracting out

When personal pension plans first became popular in the late 1980's, many individuals decided to contract out of what was then called the State Earnings Related Pensions Scheme (SERPS). SERPS was replaced by the State Second Pension (S2P) in April 2002. Contracting out is the process of electing to have National Insurance contributions, which would have been credited to the State Second Pension (or previously SERPS), redirected into a Personal Pension Plan and can be invested in a range of funds. If these perform well, you may obtain a higher income in retirement than you would have received from the State Second Pension. This does not have any impact on your basic state pension.

Taking pension benefits

The earliest age at which most people will be able to draw benefits will rise from 50 to 55 on 6 April 2010. Special provisions apply if you are seriously ill. Flexible retirement is now being encouraged by allowing people to carry on working for employers whilst also receiving a pension.

Early Retirement

The minimum retirement age will rise to 55 in April 2010. However, you still have the right to earlier retirement if:

• You are an occupational scheme member who has a contractual right to retire before age 55 that was in existence before 10 December 2003.
• You are a member of a statutory scheme (e.g. civil servant) and were given a contractual right to retire before 55 at any time before 6 April 2006.
• You joined an occupational pension scheme between 10 December 2003 and 5 April 2006, and it was normal practice before 10 December 2003 for employees in the scheme to be able to retire before 55.
• As at 5 April 2006 you were a member of a personal pension scheme or retirement annuity with a low retirement age (e.g. sportsperson).

The tax-free cash sum

The general limit for tax-free cash ? now called the pension commencement lump sum - when benefits are drawn is simply 25% of the value of your total benefits for any pension arrangement. This includes Protected Rights, i.e. funds built up from contracting out of the State Earnings Related Pension Scheme (SERPS) and/or the State Second Pension (S2P) via a personal pension or money purchase occupational scheme.

Additional voluntary contributions (AVCs) and free-standing AVCs can provide tax-free cash directly, something which was not normally permitted under the previous rules. There is no cash ceiling on the amount of tax-free cash, other than the initial £400,000 stemming from the maximum 25% of the £1.6m lifetime allowance.

Pension Transfers

There may prove to be many benefits in transferring your old pension into a newer arrangement. These may be tax related, cost related or simply to organise the overall retirement fund. The investments in your pension funds may not be performing as they should and if they are under performing and the projections identify a shortfall a transfer may help you obtain just that little bit more at retirement.

Attitude to Risk

There will be risks involved with pension planning and it is important that we fully quantify your attitude to risk on a pre-determined scale. What do you think your attitude to risk is on a scale of 1 to 10? Find out by completing our online attitude to risk questionnaire!

For more information on retirement planning please complete the following client enquiry form and one of our advisers will call you back to arrange an appointment. Alternatively you may telephone us on 08454 50 50 60 or email us at info@mcp-financial.co.uk