Getting Flexible With Your Contributions

If you ever thought working out how much you could put away in a retirement plan was complex, then you’re either reading an ancient pensions guide book or your earning level is up with Premier League footballers and investment bankers.

For ordinary mortals (that’s the rest of us), the answer is very simple. You can invest what you earn – yes, every penny of it – into a pension plan. OK, you’re unlikely to be in that position but it underlines how far we’ve moved since 2006 away from the days when you need to consult nine different rule books and keep a calculator at hand to ensure you did not bust your pension contribution limits.

Now, flexibility is the key whether you have a pension through your workplace or via another route or a mix of the two. As long as you earned the money from employment or self-employment you can use it as a pension contribution.

The emphasis is on “earning” – if the money comes from interest, dividends, or capital gains you make when you sell a property or other assets such as shares or that vintage Ferrari, then it does not count.

There are special rules for stakeholder pensions for those who are out of work, between jobs, taking time off to raise a family or care for a dependant and for under 18s.

The new rules make saving in pension schemes more flexible.

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 are 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. And it is now easier to save in more than one scheme should you wish. So you could take maximum advantage of a workplace plan and then add some more outside as it now easy to mix personal and employer paid schemes.

These Rules Make Saving For a Pension More Flexible

There are also alternatives when it comes to turning your pension pot into a retirement income.

You are now able to

• Invest in an annuity providing a regular and secure income for the rest of your life – and, in some cases, for the life of your partner or other named person.
• Draw income directly from your pension plan while keeping your annuity options open until you reach 75 – this is called “income drawdown”. This has plus and minus points and requires professional advice before entering into a contract. You will need a substantial pension pot to make this worthwhile.
• The Alternatively Secured Pension is a little known device which allows you to retain your pension pot and bypass the rules that say you must turn your personal pension into an annuity when you reach 75. You family could even inherit your pension savings. But very few ASPs have ever been sold because there are some horrific tax charges to make up for the apparent freedom.
• Work while you take a pension. You have always been able to work while drawing a pension from the state or a pensions company or an employer. Now, you can draw a pension from a workplace scheme while continuing to work in the same employment – possibly even building up a second pension entitlement. So you could work fewer hours but have the same overall earnings thanks to the pension. More flexibility.

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. And as that stands at £1.75m (rising to £1.8m on April 6, 2010) breaching the lifetime limit is only of concern to those with so much money that they really don’t have retirement income concerns.

After all, if you’re rich enough to have built up a pension pot of this size, then you’ve probably got a pretty good team of accountants to sort all this out for you!

But, whatever you decide to do, always take professional advice before investing in a pension. Unlike most other forms of investment, you can’t change your mind once or sell the holding. A pension is really for life.

Read Our Full UK Pensions Guide

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