Life & Culture

Pensions revealed


Have you managed to keep up with the pension reform proposals? With so much going on, I thought it useful to summarise the government's plans.

How much can you contribute to your pension? New limits for pensions tax relief will mean contributions of up to £50,000 a year receiving full tax relief, while the lifetime limit on accumulated pension funds will be cut from £1.8 million to £1.5 million - but anyone already over the limit should be protected. So top-rate tax relief remains an extremely attractive incentive for pension savings.

Will you have to buy an annuity (the guaranteed income for life which the government currently forces you to buy from an insurance company in exchange for your pension fund by age 75)? This unpopular requirement is being abolished. Initially, the age limit has been raised to 77, to allow time for new legislation next year.

People will be allowed to withdraw money from their pension fund, rather than annuitising, as long as they have sufficient pension income to avoid needing State benefits in retirement.

This will only help the wealthiest pension savers, but I hope mandatory annuitisation will be abolished for everyone.

In fact, if the rumoured single state pension of at least £140 a week for anyone with a full National Insurance record actually happens, there would be no need to force annuitisation anyway.

Such radical reform of state pensions is long overdue and could be funded by increasing the State pension age. However, the timetable for raising State pension age to 66 by 2020 needs to be delayed, as it will unfairly hit hundreds of thousands of women, with insufficient time to prepare.

What about workplace pensions? Major reforms will force every employer by 2017 to automatically enrol employees earning over £7,500 a year into a pension scheme. Employers must contribute up to three per cent of salary, for employees contributing four per cent.

To facilitate this, the government is setting up the National Employment Savings Trust (NEST) which will be a national pension scheme for every worker. Initial charges will be high, but ultimately it should be low cost.

Will this work well? I have my doubts. A major concern is that employers, who on average contribute about six per cent to workers' pensions, may cut contributions to the three per cent minimum, leaving many workers with lower pensions in future.

There is so much happening and still further changes to come, with pension inflation increases becoming less generous and public sector pension reforms. So watch out for more pension headlines in the months ahead.

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