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Adair
Turner, chairman of the Pensions Commission, said the government should
find ways to "revitalise" the voluntary private pensions system to
encourage greater investment. For those who can afford to save, this may
be achieved by pension tax simplification in April 2006, which replaces
the existing eight pension tax regimes with a single regime.
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Wake-up Call
The
increased prospect of longer retirements on lower incomes, due to
increased longevity and our reluctance to save adequately for old age,
has been highlighted in the recent Pensions Commission's* report on the
UK's creaking state and private pension systems.
Working
longer and saving more
The
Commission's specific recommendations to the government will not be
published until after the general election, but this interim report
stresses that to avoid comparative poverty in old age we must consider
working longer and saving more.
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Not surprisingly,
the report also expresses concern over the trend away from defined
benefit (DB) occupational pension schemes to defined contribution (DC)
arrangements. Traditional DB schemes link the retirement income to the
employee's final salary and confer investment and longevity risk on the
sponsoring employer, while DC schemes transfer these risks to individual
members. Employers usually pay far less into DC schemes compared with
historic contribution rates to DB, the report notes.
Impact
of increasing longevity
If you are in
a DC scheme or you have a personal pension it is important to take into
account the impact of increasing longevity. The Commission states that
average male life expectancy at age 65 has increased from 12 years in
1950 to 19 years today.
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Lifetime
Allowance
The proposed new rules may allow
you to contribute up to 100 per cent of your annual earnings to your
pension arrangements although in practice you are likely to restrict
your contributions so that they do not exceed the Annual Allowance (£215,000
in tax year 2006/07) in view of the tax treatment of any excess
contributions. Moreover,
over the course of your career you can accrue funds up to the Lifetime
Allowance of £1.5m (in tax year 2006/07). Anything above the Lifetime
Allowance will be subject to a Lifetime Allowance charge (eg. 55% where
the excess is taken as a lump sum). However, if the value of your
pension rights already exceeds the Lifetime Allowance as at 6 April
2006, or you can expect it to do so after April 2006, you can opt to
protect such benefits under the transitional arrangements provided by
the Revenue. Higher earners
and those with substantial pension benefits should talk to us about
whether they should seek such protection of their pre 6 April 2006
pension rights.
* Pensions:
Challenges and Choices - First Report of the Pensions Commission
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