Retirement
The maximum total retirement benefits, from all sources, that an individual can receive, must be within the Lifetime Allowance. Otherwise a tax charge will apply on the benefits in excess. For the tax year 2006/07, the Lifetime Allowance will be £1.5m. It will then increase each year as follows:
- 2006/07 £1.5m
- 2007/08 £1.6m
- 2008/09 £1.65m
- 2009/10 £1.75m
- 2010/11 £1.8m
See the seperate section on the Lifetime Allowance.
Final Salary
If you are in a final salary pension scheme, at retirement your scheme will provide a pension based upon your pensionable service and final pensionable salary. Your scheme's rules and the scheme's 'accrual rate' will determine this. The accrual rate is the proportion of your salary that you receive in pension for each year of service. For example, if the accrual rate is 60ths, you will receive 1/60 th of pensionable salary for each year of completed pensionable service.
It may also be possible to choose a tax-free lump sum. The amount of the lump will depend upon the scheme's rules and in any event will be limited to 25% of the capital value of your pension.
If you are able to draw your pension earlier than the scheme's normal retirement age, the amount of pension will normally be reduced to take account of the early payment. The ability to early retire and the extent of any reduction will depend upon your scheme's rules. Often the ability to take benefits early will require the agreement of your employer, the scheme's trustees, or both. Sometimes, better terms are offered if retirement is as a result of ill health or redundancy. In any event, early payment of pension (except on grounds of ill health) is not allowed before age 50. This will rise to 55 by 2010.
Money Purchase
If your pension scheme is a money purchase scheme, at retirement you will need to use your pension savings to purchase an income. You will also have the option to use part of your savings, up to 25%, as a tax-free cash sum. The amount of pension payable from the scheme is dependent upon:
- the amount of money paid into the scheme (by you and your employer);
- how well the investments has performed; and
- the 'annuity rate' at retirement. An annuity rate is the factor used to convert your pension savings into a pension.
Members should also be given the chance to use the open market option. This allows you to explore the market place and possibly purchase an annuity on better terms. See our section on Annuities in the Personal Pension Section.
The earliest age retirement pension can be taken (except on grounds of ill health is 50. This will rise to 55 by 2010.
Flexible Retirement
From 6 April 2006, unless scheme rules require otherwise, it is no longer necessary to cease work to draw a pension from the same employer. It's now possible to continue working and draw pension and if the scheme allows, build up further pension rights. It is important to note however that this option is dependent upon the scheme's rules allowing it.
- How can I tell if my retirement benefits are within the Lifetime Allowance?
If your pension is from a final salary scheme, it is valued using a factor of 20:1. If your scheme is a money purchase scheme, you should use its market value. Any pensions already in payment are valued using a factor of 25:1.
- How can I find out if I can retire early?
This will depend on your scheme rules. Ask your pension scheme about the scheme's requirements and to whom applications should be addressed. You should also check how much reduction, if any is applied in the event of a pension being drawn early.
- Do I need to give up part of my pension to receive a cash lump sum?
To receive a cash lump sum most final salary pension schemes require you to give up part of your pension in exchange. However, some public sector schemes offer a pension and lump sum separately so you do not have to give up any of your pension for a cash lump sum.
In a money purchase scheme, part of your fund can used to provide a cash sum and the excess used to purchase an income.
Q & As
