Single tier state pension from 2016

Simon Hoadley ENGSUS00120121010110141
Simon Hoadley ENGSUS00120121010110141
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The 2014 Budget proposals have been described as a ‘pension’s revolution’.

The maximum tax-efficient limit for contributions to all your pension arrangements during a tax year is just £40,000.

Automatic enrolment of employees and other workers into pension schemes is gradually progressing through the labour force.

The current structure of the state pension – basic state pension plus, for employees, the State Second Pension (S2P) – will be replaced by a new single-tier state pension from April 2016.

This will cover both the employed and the self-employed, and it will be worth a maximum of about £150 a week in today’s terms.

The proposals focus on money purchase pension arrangements. These types of pension schemes allow you to build up a fund of money that you use to provide a retirement income and a tax-free lump sum.

Traditionally, most people have used their fund to buy an annuity to provide a regular retirement income, or accessed their fund through a capped drawdown plan.

But from 6 April 2015, all members of a money purchase arrangement will be able to draw money as they see fit after the age of 55. The tax-free lump sum limit of up to 25 per cent of the fund will remain, with the rest of the fund taxable as income.

In theory, the flexibility will allow a pension fund to be treated in the same way as any other investment.

However, in practice, the tax treatment will discourage the extraction of large sums in a single year.

So, unless you really need the extra income, you may want to limit any increase to keep you in your current tax band.