Be ready for the new personal pension rules

The rules affecting personal pensions contributions and how and when income benefits must be taken are being changed from April 5.

The main changes are:

z Maximum contribution to a personal pension where you earn less than £150,000 each year is going to fall from £255,000 to £50,000. There are only a few days left to make very substantial contributions to a pension.

z Maximum income currently allowed, is to fall by 20 per cent to bring the income into line with traditional aannuity levels. For a 60-year-old man with a pension fund of £50,000 the maximum annual income of £3,720 will fall to £2,976. The extra income of £744 can be maintained for five years before it needs to be reviewed. This could be a useful help until his state pension starts at 65.

z Annuities do not have to be bought at age 75 as was previously necessary. This allows greater freedom to choose any method of pension income payment including the more flexible income drawdown option.

z Tax free lump sums will be allowed beyond age 75.

z The income drawdown limits (basis amount) will be reviewed every three years before age 75 rather than every five years and every year after age 75. This means that income payments may be more variable when investment conditions are volatile. At present income drawdown can be relied on to remain steady for five years and this may be preferable where you wish to have higher income for a particularly short timescale until you expect state pension or to receive some other funds from sale of an asset.

z A new flexible drawdown option will be introduced, allowing unlimited withdrawals above the capped drawdown limit as long as a minimum guaranteed lifetime income of £20,000 from secure state or company pension arrangements can be confirmed.

z Death benefits from benefits already drawn down – vested – will be charged at a rate of 55 per cent, regardless of age when death occurs. The lump sum paid on death will not be subject to inheritance tax.

Pension investments still receive full tax relief on contributions up to the allowable limits and the investments grow tax free.

If you might be retiring in the next five years or need some tax free cash for a special need you should take advice now to see if you can secure a better pension before April 5.