Personal Pension Plans and Pension Term Assurance

INTRODUCTION/ALLOWANCES

Eligibility
You are eligible to invest into a HMRC registered personal pension plan even if you do not have any earned income.

Maximum contributions
In this tax year you are allowed to make a gross contribution to a personal pension plan up to the greater of:

• £3,600 and
• 100% of your 'relevant UK earnings'. However, in 2006-07 total contributions to all your pension arrangements from all sources should not exceed the annual allowance of £215,000. Any contribution above this future would effectively not be tax relieved.

'Relevant UK earnings' are broadly earnings after deducting capital allowances and losses.

Retirement age - 50/55
Under a personal pension plan, currently the earliest you can start to draw your pension is from age 50 or 55, (see below). You may be able to take the pension earlier if you can no longer work because of mental or physical incapacity. The contract can provide a pension benefit to your widow, widower or dependant after your death, either before or after you start to draw your pension.

Age 55 and 2010
From 6 April 2010, the minimum age at which your benefits can be drawn will rise to 55. As a result you will be able to draw benefits from your 50th birthday until 5 April 2010, but then have to wait until your 55th birthday before starting to draw any further benefits.

Lifetime allowance
The new rules for pension taxation introduced from 6 April 2006 set a lifetime allowance for the total value of pension benefits. Above this level (£1,500,000 in 2006-07 rising to £1,800,000 in 2010-11) there could be a lifetime allowance charge at up to 55% when you draw benefits.

Simplification details Further details about the new tax rules for pensions effective from 6 April 2006 are contained in the appendix.
(Cross reference appendix 12.)

MAIN TAX ADVANTAGES

Tax deduction
The contributions paid under such a registered pension plan are allowed as a deduction from your taxable earnings, thus saving income tax at your top rate(s). You receive basic rate tax relief at source regardless of your tax position. For example, the immediate cost of a £1,000 gross contribution is £780. Higher rate relief is given through your tax assessment.

Tax-free roll-up in the fund
The contributions are invested in funds that accumulate free of UK tax on investment income and capital gains, although it is no longer possible for pension funds to claim the tax credits on dividends from UK equities. Nevertheless, the freedom from UK tax is still a significant investment advantage.

Pension taxed as earnings
The pension, when it becomes payable, is taxed as earned income.

Tax-free cash sum
Part of your fund can be taken as a completely tax-free cash sum at retirement. This sum must not be more than 25% of the total fund and not mote than 25% of the then lifetime allowance.

Life cover
Valuable and inexpensive life cover can be arranged alongside the plan with important advantages for inheritance tax purposes.

BENEFITS ON MATURITY

Benefits on maturity
The plan contains an option which allows you to transfer the accrued value of your fund to any authorised insurance company to buy a pension. This allows you to benefit from the best annuity rates available on the open market at that time. Alternatively, you may be able to draw an income in retirement directly from your pension fund.

LIFE COVER

Lifetime allowance
There is no limit to the amount of life cover that a pension life cover policy can provide on death before age 75. However, if the value of the lump sum payable plus the value of any other pension benefits previously drawn exceeds the lifetime allowance (£1,500,000 in 2006-07), the excess would normally be subject to a lifetime allowance charge at a rate of 55%.

If you were to exceed your lifetime allowance on death this arrangement may not be suitable. Most companies providing Pension Term Assurance will allow an option to convert to a regular term assurance if you exceed your lifetime allowance without submitting further medical evidence. However the premiums and terms and conditions are likely to be based on your age at that time.

Survivors' pensions
The lifetime allowance charge does not apply to any life cover payments used to fund pensions for your widow or widower or other dependants.

IHT-free
These benefits can be arranged so that the proceeds can be paid to beneficiaries without any charge to inheritance tax.

Tax relief on premium
The premiums will be set against earnings, thus obtaining tax relief at your marginal rate(s). However any amount paid as premiums under such an arrangement will reduce the amount available for pension provision.

DEATH BENEFIT

Type of trust
Under the provisions of this trust, the benefits can be paid within two years of your death to any among a wide class of beneficiaries, which could include your children. The proceeds would normally be payable free from inheritance tax if you die before taking retirement benefits. Such a trust is not subject to the new inheritance tax rules for trusts introduced by the Budget. This can be a useful method of providing money to those persons who will have to pay any inheritance tax in the event of your death. Use of a trust also has the advantage that the death benefit can be paid before probate is received