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.