Significant changes apply from April 2015, so that those over the age of 55:

• will be able to take all of their defined contribution pension funds as a lump sum (with 25% of up to the lifetime allowance being tax free)
• will be able to draw down on their pension savings whenever and however they wish.

Registered pensions schemes summary 2014/15

Rate of tax on pensions income 20%/40%/45%
Tax–free lump sum (as a percentage of your pension pot) 25%
Rate of relief for contributions 20%/40%/45%
Annual allowance £50,000
Lifetime allowance (subject to transitional claims) £1.25m
Equivalent to defined benefit pension £75,000 p.a.
Normal minimum pension age 55
The government is consulting on proposals to increase the normal minimum pension age and potentially fix it to be ten years below the state pension age.

Contributions

Tax relief for contributions is given at the individual’s marginal rate of income tax but some individuals may be subject to the annual allowance charge regime (see below), which can restrict the tax relief available on contributions.
There is no overall limit to employer or employee contributions.

Employee contributions are only deductible for income tax if they don’t exceed taxable earnings. However, UK resident individuals can pay £3,600 p.a. gross (£2,880 net of basic rate tax at 20%) to a relief at source scheme (i.e. a personal pension type scheme) net of basic rate tax, even if the individual doesn’t have taxable earnings of this amount.

Annual allowance

If the sum of tax–relieved contributions by the employee and contributions by the employer exceeds the annual allowance, the excess is charged to income tax on the employee.
Contributions to each pension arrangement are measured in pension input periods and it’s the sum of the contributions during the pension input periods ending in the relevant tax year that counts towards the annual allowance limit for that year.

For the purpose of the annual allowance test, an accrual of defined benefit pension is deemed to be worth 16 times the increase in the annual rate of pension payable from normal retirement age, plus the increase in any additional retirement lump sum. But the increase in the accrued pension at the start of the year doesn’t count towards the annual allowance to the extent that it doesn’t exceed an inflation factor.

If contributions (or benefit accrual in a defined benefit scheme) exceed the annual allowance, an individual may carry forward unused annual allowance from the three previous tax years, provided that the individual was a member of a registered pension scheme in the earlier year being used. The earliest year is used first.

An employee can usually ask the pension fund to pay any annual allowance charge on his or her behalf if the contribution or benefit accrual in that scheme by itself was more than the annual allowance and the charge is more than £2,000. The scheme can refuse such a request only in exceptional circumstances. Where the scheme pays, it must adjust the individual’s pension benefits accordingly on a just and reasonable basis.

Benefits

The minimum age for taking retirement benefits, except in cases of ill–health retirement, is generally 55.

Pensions are taxable when paid at the normal rates of income tax (i.e. 20%, 40% or 45% depending on the amount of total income received).

At the time of first drawing a pension, an individual usually has an option to take a proportion of the benefit as a pension commencement lump sum. The lump sum can’t exceed 25% of the fund for a defined contribution scheme (or 25% of the standard lifetime allowance if less). The same rule applies for a defined benefit scheme, calculated assuming that the pension, after commutation to provide the lump sum, is deemed to be equal to a pension pot of 20 times the annual rate of the pension.

Benefits above the lifetime allowance are subject to further taxation.

Lifetime allowance

Every individual has a lifetime allowance (LTA) against which the capital value of pension benefits is tested when each benefit first comes into payment. In valuing benefits for this purpose, a defined benefit pension is valued at £20 for each £1 p.a. of pension (£25 for each £1 p.a. of pension already in payment on 6 April 2006).

The capital value is tested as a percentage of the standard LTA in force in the tax year in which the benefit is tested. Any benefits from registered schemes in excess of the allowance (i.e. once 100% of the individual’s LTA has been used up in this way) will be subject to a LTA charge, the rate of which depends on whether the excess is paid as a lump sum (rate 55%) or as an annuity (rate 25% and the annuity itself is then subject to income tax).

Special rules apply for individuals who have a certificate from HMRC granting primary protection, enhanced protection or fixed protection.