Wake-up Call The increased prospect of longer retirements on lower incomes, due to increased longevity and our reluctance to save adequately for old age, has been highlighted in the recent Pensions Commission's* report on the UK's creaking state and private pension systems.

Working longer and saving more
The Commission's specific recommendations to the government will not be published until after the general election, but this interim report stresses that to avoid comparative poverty in old age we must consider working longer and saving more.

Not surprisingly, the report also expresses concern over the trend away from defined benefit (DB) occupational pension schemes to defined contribution (DC) arrangements. Traditional DB schemes link the retirement income to the employee's final salary and confer investment and longevity risk on the sponsoring employer, while DC schemes transfer these risks to individual members. Employers usually pay far less into DC schemes compared with historic contribution rates to DB, the report notes.

Impact of increasing longevity
If you are in a DC scheme or you have a personal pension it is important to take into account the impact of increasing longevity. The Commission states the average male life expectancy at age 65 has increased from 12 years in 1950 to 19 years today.

Adair Turner, chairman of the Pensions Commission, said the government should find ways to "revitalise" the voluntary private pensions system to encourage greater investment. For those who can afford to save, this may be achieved by pension tax simplification in April 2006, which replaces the existing eight pension tax regimes with a single regime.

Lifetime Allowance
The proposed new rules may allow you to contribute up to 100 per cent of your annual earnings to your pension arranements although in practice you are likely to restrict your contributions so that they do not exceed the Annual Allowance £215,000 in tax year 2006/07) in view of the tax treatment of any excess contributions. Moreover, over the course of your career you can accrue funds up to the Lifetime Allowance of £1.5m (in tax year 2006/07). Anything above the Liftetime Allowance will be subject to a Lifetime Allowance charge (e.g. 55% where the excess is taken as a lump sum). However, if the value of your pension rights already exceeds the Lifetime Allowance as at 6 April 2006, or you can expect it to do so after April 2006, you can opt to protect such benefits under the transitional arrangements provided by the Revenue. HIgher earners and those with substantial pension benefits should talk to us about whether they should seek such protection of their pre 6 April 2006 pension rights.

* Pensions: Challenges and Choices - First Report of the Pension Commission.