Page last updated at 07:59 GMT, Thursday, 6 April 2006 08:59 UK

Q&A: A-Day pension reforms

The sun rising
A new age dawns for UK pensions on 6 April
6 April is A-Day, heralding the biggest shake up of UK pensions in more than a decade.

The BBC News website examines what these pension changes mean to you and your finances.

What exactly is A-Day?

On 6 April, a new set of pension rules come into force.

From now on, if you want to be a member of a company pension scheme and save money in a personal pension at the same time, then you can.

Previously, dual rights to membership of a company scheme and a personal pension plan was only open to people who earned less than 30,000 a year.

You will also be able to draw your pension and carry on working.

The big idea is to make pension saving much less complex.

I am in my fifties and wonder whether I am too old to start a pension, what do the A-Day changes mean to me?

One of the key A-Day changes is designed to tempt people like you to save in a pension.

In the past, a major criticism of the UK pension system was that it took many years for most people to be able to build up a substantial pension fund.

The complex system, which linked the percentage of income people were allowed to save in a pension to their age, was blamed for this.

This system has now been swept away.

In future, people can invest up to 100% of their earned income in any tax year - up to a ceiling of 215,000 - and receive tax relief at their highest marginal rate.

This should allow people to save substantial sums in their pension quickly.

In addition, people will be free to build up a pension fund up to a lifetime limit, initially 1.5m, before tax restrictions kick in. This lifetime limit will rise to 1.8m in 2010.

Are the annuity rules changing?

Yes, they are. The requirement which forces pension savers to buy an annuity by their 75th birthday is being abolished.

Instead, pension savers will be able to draw an income direct from their pension fund.

However, it was announced in March's Budget that pension funds which are not used to buy an annuity would be subject to inheritance tax (IHT).

Will this help solve the UK pensions crisis?

On its own, A-Day is unlikely to have a dramatic effect on the levels of UK pensions saving.

Last year's report by the government's Pensions Commission concluded that the UK's pensions problem is both deep-rooted and long-term.

Put simply, the UK is going to have to find a way to pay for people living longer.

A-Day does nothing about this demographic timebomb, as it has been dubbed.

As for firms closing employee workplace final salary pension schemes, A-Day offers no way out.

What does the financial services industry think of A-Day?

The industry, for once, is almost united in welcoming A-Day.

Pension saving has had a terrible press in recent years.

Mis-selling scandals, poor performance and high charges have led to personal pensions losing their appeal.

In short, many people see pension saving as too complex and restrictive.

Against the backdrop of a booming housing market, increasing numbers of people have been relying on buy-to-let property to provide the financial wherewithal for a comfortable old age.

The industry hopes that the A-Day changes - reducing complexity and introducing greater flexibility - will persuade people to turn once again to pension saving.

Only time will tell whether their hopes will come to fruition.



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