With A-Day less than a year away we have now started to receive a number of client enquiries regarding many aspects of A-Day. These are the most commonly asked questions.

Q: What is the effect of A-Day on existing pensions?
A: This will depend on the type of arrangement you hold, or the type of scheme to which you belong. Some types of pension will be affected more than others so it would be sensible to discuss this with us to ensure that your existing arrangements will still meet your needs.

Q: Do the A-Day changes in the tax-free lump sum affect my existing pensions provision?
A: Yes, in some cases there will be a direct change. For example, Reitrement Annuity policies currently have a unique method of calculating maximum tax-free cash when benefits are taken. This will be replaced at A-Day by a maximum amount of 25% of the fund value. Under current rules if benefits were taken now, some of these policies may provide the potential of greater than 25% tax-free cash. This potential will be lost after A-Day. In other cases, for occupational pensions, it will be possible to retain existing cash rights and these would be preserved after A-Day. This is a complex area and we strongly recommend that you should discuss this with us.

Q: Are there changes to my annuity after A-Day?
A: If you already have a pension annuity, the A-Day changes will not, for the most part, affect you. However, in the 2005 Finance Bill, the Government set out measures that would allow the transfer of annuities from one provider to another, which is currently not possible..

Q: Can I protect my existing benefits before and after A-Day?
A: Yes, under measures termed 'transitional protection' it will be possible to protect both pension benefits built up prior to A-Day and also post A-Day fund growth. This might be desirable if your benefits are already above or close to the Lifetime Allowance or you feel that growth may cause the Lifetime Allowance to be exceeded in the future.

Q: After A-Day, how much will I be able to put into my pension each year?
A: There is actually no restriction on pension contributions, but there is a limit to how much tax relief would be allowable. This will either be the lower of your gross annual earnings or the Annual Allowance (£215,000 for 2006/7). If an employer wishes to make contributions on your behalf into your pension fund, the are not restricted by the level of your earnings. However, any contributions in excess of the Annual Allowance would be taxed to you as a Benefit-in-Kind at 40%.

Many pension arrangements operate what is known as 'Relief at Source'. This means that your contributions (having been made from your taxed income) are treated as net contributions when made. The pension provider will then add on to your contribution an amount for basic rate tax (at 22%), which would have been deducted from your income. Higher rate tax-payers can reclaim further tax through the self-assessment tax return if payments have been made in this way.

Q: After A Day, do I get tax relief on it all?
A: This would depend on the amount of the contribution and the level of your earnings. You will obtain full tax relief on either the lower of your gross annual earnings or the Annual Allowance (£215,000 for 2006/7). If you currently earn less than £3,500, you can also receive tax relief on pension contributions up to this amount. This will continue to be the case after A-Day.

Q: What's the Lifetime Allowance? Is it going to increase?
A: The Lifetime Allowance effectively restricts the total amount of pension an individual can build up from tax-relieved contributions in either a single or several different schemes. Amounts over the Lifetimie Allowance will be demed excessive and subject to a tax 'recovery charge'. The scale of this charge is designed to take back the benefits of tax relief and growth on the 'excess' of the fund. The Lifetime Allowance (£1.5m in 2006/7) has been set by Treasury Order and will increase annually until the 2010/11 tax year where it will be £1.8m. It is expected that further Treasury Orders will set out the Lifetime Allowances from this point in due course. Under the Finance Act of 2004, the Lifetime Allowance cannot reduce but there is no legislative commitment to increase it annually.

Q: What are the limits of my tax ceiling after A-Day?
A: The Lifetime Allowance sets a 'ceiling' in the sense it will restrict the total amount of pension an individual can build up from tax relieved contributions in either a single scheme or over several schemes. Amounts above the Lifetime Allowance will be deemed excessive and subject to a tax 'recovery charge'. The scale of this charge is designed to take back the benefits of tax relief and growth on the 'excess' of the fund. In building up a pension fund, everyone will be entitled to tax relief up to the level of their gross earnings or the Annual Allowance (£215,000 in 2006/7), whichever is the lower. Individuals with low earnings or without a source of earnings will still be entitled to contribute £3,600 a year.

Q: What happens if you go over the Lifetime Allowance?
A: Amounts in excess of the Lifetime Allowance when pension benefits are taken will be subject to a recovery charge. This will be 25% if the excess is taken as a taxable income or 55% if taken as cash. The Lifetime Allowance will also define the maximum amount that can be paid out as a tax-free lump sum if you die before yout ake benefits from your pension funds.

Q: After A-Day, if the limits have been reached, what affect will this have on my tax position?
A: Amounts in excess of the Lifetime Allowance when pension benefits are taken will be subject to a recovery charge. This will be 25% if the excess is taken as taxable income or 55% if taken as cash. Your other sources of income woul be taxed in the usual maner. If you took your excess fund as income, it would be subject to income tax.

Q: Is it true that after A-Day, I'll be able to buy a second home and put it in my pension? How will that work?
A: Provided the pension fund was of sufficient value, it could buy the house either from you or from the open market. You would need to check whether your particular scheme was suitable for this type of purchase. You might want to transfer to a new arrangement where there was some experience in handling these transactions. You may also need to consolidate several existing pension arrangements into one to gain sufficient value.

If your pension is not of sufficient value to make the purchase, you could make further contributions, based on your earnings, to increase the value.

The transaction would need the pension fund to have cash available, so existing investments may need to be liquidated although it will be possible for pension schemes to borrow. If you already own the house as a second home and you are selling it to the pension fund, then you may need to pay Capital Gains Tax on the sale. The pension fund would also need to pay the appropriate rate of Stamp Duty. Care must be taken to ensure the the sale is conducted at the market rate of the property, otherwise the Inland Revenue could consider than an under or over-value transaction has occured and impose tax penalties.

If you would like to discuss A-Day further - please e-mail for further information.

Levels and bases of, and reliefs from, taxation are subject to change.