By Paul Lewis
BBC Radio 4's Money Box
It may pay you to wait a year before planning your retirement
Changes to pension rules which start next April could mean more cash for people who put off their retirement.
At the moment people who have paid into a separate extra pension on top of their company scheme -additional voluntary contributions (AVCs) - normally have to use all that money to buy a pension for life, an annuity.
Tom McPhail, Pensions Manager at IFAs Hargreaves Lansdown, explained next April's changes on Radio 4's Money Box programme.
"These top-up savings plans, AVC schemes, will be allowed to pay out a quarter of their total value as a tax-free lump sum, but only if you retire from 6 April 2006. If someone retires before that, they will only be able to take the fund as an income and pay income tax on it all."
There are also fewer restrictions on people who have a small amount saved up for their pension, but not very much.
"The Inland Revenue recognises that it doesn't make sense to buy an annuity and get £3 a week income. So from April next year, anyone with total assets in their pension funds of up to £15,000 can have the whole lot back as a lump sum.
"They will have to pay tax on three quarters of it. But for most people it will be easier to take it and decide what to do with it rather than have a small amount of income dribbling in each month," said Mr McPhail.
Although most changes start next year, some have already been introduced.
From April next year, total pension savings cannot exceed £1.5m
Stuart Bailey, who runs IFAs Annuity Direct, said there is already greater choice when people buy their annuity.
He said: "One change that has started this year in relation to additional pensions - including AVCs and part of the company scheme that represents the state second pension you have given up - is that you won't have to buy an annuity with protection against inflation; what is called the Limited Price Protection (LPI).
"Instead, you will be able to buy a level annuity without inflation proofing."
Level annuities start off bigger but never increase. Price protected annuities start lower but rise each year in line with inflation.
But Mr Bailey said although they get less at first, people should consider them.
"I think they should. In the past all their second state pension, even when that is paid by their company through things called protected rights or guaranteed minimum pension, has had price escalation built in.
"In future it won't have that automatically. If people choose a flat annuity, then in 20 years time they are likely to be suffering from inflation."
One other group who should take advice now are the people who have very large pension funds.
From April next year, total pension savings cannot exceed £1.5m, including the value of any company pension entitlement. A future pension is valued by multiplying it by 20, so anyone whose pension approaches £75,000 is heading for the limit.
And Mr McPhail says going above will be costly.
"Anything more than that and you are going to be charged 55% tax on the fund. So it makes sense to get as much in now and then stop and let what has accumulated grow. If you have funds in that sort of territory you need advice and I think you should get it soon."
These large pension funds can be protected as long as they are registered with the Inland Revenue before next April.
But anyone who fails to do that will find their fund taxed at 55% on the surplus over the £1.5m limit. If the pension is paid as income, the tax will be 25% on top of any normal income tax.
BBC Radio 4's Money Box was broadcast on Saturday, 16 April 2005, at 1202 BST.
The programme was repeated on Sunday, 17 April, 2005, at 2102 BST.