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Know your limits
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 In between plotting his accession to Number 10, Chancellor Gordon Brown has found the time to change pension rules recently. Observers initially thought the new rules would only concern a minority of wealthy individuals but in reality an increasing number of retirees will be affected.
Historically, personal pensions were limited by age-based annual contribution ceilings, subject to an overall annual maximum. Now standard lifetime allowance thresholds have been introduced. People are now permitted to invest up to 100% of their salary, capped at £215,000, a figure that will rise to £255,000 incrementally over the next five years.
But, the overall size of an individual's pension fund, including both employer defined benefit schemes and personal pensions, must not exceed £1.5 million, rising to £1.8 million in 2010/11. Anything above this amount could be taxed at a whopping 55%.
The good news is there are ways of avoiding the tax for people whose pension pots are close to, or which have already exceeded, the £1.5 million threshold.
Those with pension assets which exceeded the threshold at 5 April 2006 may seek Primary Protection, which allows their pension limit to grow at a proportional rate to the standard lifetime allowance without incurring any additional tax liability at retirement. Alternatively, one may seek Enhanced Protection if over or under the threshold, which allows the fund to grow to any size without incurring tax, but crucially does not allow any further contributions to be made without incurring onerous tax charges. So how does the tax man calculate the value of your pension scheme?
Employer defined benefit (final salary) schemes are valued at 20 times the accrued annual benefit and the value of a personal pension is simply added to the total. So if, for example, you have a future pension of £30,000 in a company defined benefit scheme and £500,000 personal pension plan and are yet to retire, your pension value is deemed to be £1.1 million.
If you are retired and your company defined benefit scheme is being paid out, its value is based on a calculation based on 25 times the pension in payment. So if you are retired and have a pension of £30,000 in a defined benefit scheme that is being paid and a personal pension plan worth £500,000, your total pension value is deemed to be £1.25 million.
Retirees and those people approaching retirement should be aware of these changes and seek professional advice where necessary. It is also important to bear in mind where the pension is invested. Those invested in volatile asset classes, for example, could see a pension currently worth £1 million approach the limit quite quickly if returns are sufficiently strong.
Additionally, retirees now have more choice than ever before about how to derive income from their pension assets. Purchasing an annuity is by no means mandatory and the different income options available obviously suit different people. Again, we encourage investors to seek professional advice and consider all options available.
Past performance should not be seen as a guide to the future. The value of an investment can fall as well as rise.
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