What a difference A-Day makes to our pension cash

How the new, flexible rules will work as Thursday ushers in a fresh start for savers
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The Independent Online

Millions of us will wake up on Thursday to a new era of freedom and choice.

From 6 April - branded in the industry as A-Day - and depending on our age, many of us will be given far greater influence over our retirement savings.

We'll all be able to save more, and do so more easily, while benefiting from greater flexibility in the pensions regime.

Yet many people will stumble into this brave new world with no idea of the benefits they can grab to improve their retirement prospects. Nearly two-thirds of us aren't aware of what A-Day is, according to estimates from a recent survey by the investment bank JPMorgan.

However, it's easy to lose sight of the changes when the fractious debate on the British pensions landscape may well have obscured a clear view.

Only last week a public sector strike over proposals to raise the retirement age brought many services to a standstill.

And in March the Government's refusal to compensate more than 85,000 workers who lost their pensions when their employers went bust sparked outrage from MPs, consumer groups and the Parliamentary Ombudsman.

Meanwhile, Lord Turner's proposals for a new national pensions saving scheme, and a link between rises in the basic state pension and average earnings, rather than inflation, continue to rankle the Treasury.

But while there's a lot to keep up with, the new regime is here for everyone.

Here are the "ages of A-Day" and some of the big points to watch out for.

Your twenties

A-Day brings big changes for young workers.

For years, people in their twenties have only been able to put up to 15 per cent of their salaries into their company pensions.

But from Thursday, they will be able to contribute the equivalent of 100 per cent of their salary to a pension - whether company or personal - though with an upper limit (£215,000 from both individual and employer in the 2006-07 tax year). This means that employees can consider investing annual bonuses or other windfalls - which might previously have taken them over the threshold.

"The new contribution limits are particularly relevant to people in their twenties and in their fifties [see below]," says Tom McPhail at independent financial adviser (IFA) Hargreaves Lansdown.

"Younger savers can defer locking money into a pension when they first start working, and instead put money into a mini cash individual saving account (ISA). [That way] they can retain control of the cash and, when ready, pay it as a lump sum into a pension."

Your thirties

Many IFAs recommend that you increase your level of contributions each year as earnings increase.

A popular - if, for some, slightly ambitious - benchmark used to gauge how much you should invest for a comfortable pension is to halve your age and use this figure as the percentage of your salary you need to put into your savings.

If you feel you may be behind on your retirement nest egg, the new, flexible A-Day rules will also allow you to pay into a personal pension - perhaps a stakeholder or self-invested personal pension (Sipp) - at the same time as paying into a company scheme (again, as long as you don't break the £215,000 limit).

Alternatively, you can now "fast track" your pension by putting a small inheritance or savings lump sum straight into your fund, and qualify for tax relief.

Your forties

Many employees in their forties are starting to see their share-option or Save As You Earn schemes mature after five or seven years of investment.

As the rules stand, workers can struggle to cash in their shares without paying capital gains tax of up to 40 per cent. The only way round this involves the complicated juggling of ISA allowances.

But as A-Day dawns, there will be a new option for maturing share schemes.

Many companies are planning to offer a group Sipp that can house the shares or cash from these maturing schemes.

Elsewhere, the £215,000 rule should also allow all but the wealthiest to fortify their savings, using personal pensions and lump sum payments.

Your fifties

The new rules mean that, after the age of 50 (55 from 2010), you will be able to take 25 per cent of your pension pot tax-free, and either buy an annuity (an income for life) with the rest or draw down a set income (known as the "unsecured pension"), regardless of whether you have retired or are still working.

With the unsecured pension, people will now be allowed to draw a more generous income from their pot, as determined by the Government's actuary.

"It is often also at this age that people start to realise that they have not saved enough and look for ways to boost their retirement fund," says John Lawson, head of pension policy at insurer Standard Life.

From Thursday, he anticipates that growing numbers will actually borrow money to invest in their pension - "just one of the new wheezes A-Day allows". This works, he says, as the cash that is invested attracts tax relief and pays out more than it costs to borrow.

Your sixties

For most of us, this is the time to retire. After A-Day, people retiring with small pension pots of £15,000 or less will no longer have to buy an annuity at all. Instead, they can take a quarter of the sum tax-free; the rest is taxed at the basic rate.

For the lucky ones with large pensions, there is a £1.5m "lifetime" limit. Any pension above this incurs a 25 per cent charge.

Your seventies

Some of the biggest changes affect people in this age bracket.

The most popular measure is likely to be the birth of the "family Sipp": people over 75 will have the option of an "alternative secured pension", allowing any residual pension on death to be left to heirs.

That residual pension will have to be inherited by family members who are in the same pension scheme - and it can also only be passed on if there is no surviving spouse. It is also liable to inheritance tax (IHT) at 40 per cent of any amount over £285,000 (in the new tax year). However, many pensioners will prefer to pass on their remaining pension, even after an IHT hit, instead of it dying with them.

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