A-Day has come and gone and we are now in a new pensions' regime, but how simple is it?

To date there has been 45 statutory instruments, there is still some technical guidance outstanding, employer/administrator/member guidance and Finance Bill 2006 changes, so there is still more work for the powers that be before there is clarity in all areas. But we do know:

• You can pay a lot more in!
• You can be a member of many schemes.
• There are more retirement options.
• It is now possible to obtain tax relief on life cover

Contributions

It is now possible for an employer to contribute up to £215,000 each year, but be careful. The local Inspector of Taxes may only grant tax relief if the level of contribution is reasonable and "wholly and exclusively" for purposes of the employer's business. Particular care should be taken where employer contributions are paid when there are nominal employee earnings - for example, where dividends are effectively paid as earnings to avoid national insurance contributions.

Employees can contribute up to 100% of earnings. This can be a particularly useful way of keeping tax down to basic rate - it may be useful for those encashing investment bonds to avoid higher rates of tax.

Investment companies can now pay pension contributions.

With contribution limits effectively gone, what should we pay into pension? The old limits were a good target, but inevitably it is down to affordability. At MDM we feel, the minimum contributions between the employee and employer should be as follows:

• 20s - 10%
• 30s - 15%
• 40s - 20%
• 50s - 25%

The government has also introduced rules which are aimed at stopping the recycling of tax free cash. Care should therefore be taken when making significant extra contributions just before or after tax free cash has been taken.

Scheme Membership

Historically, you have not been able to be a member of your employer's pension scheme and continue contributions to a personal pension/Stakeholder plan. Some years ago, there were changes which allowed you to be members of both types of pension, but only if your earnings were below £30,000. Now you can be a member of as many schemes as you want.

There may then be merit in contributing personally to a private arrangement. Your employer cannot see what you are doing - you will have a wider range of investments and you do not have to keep changing companies in respect of personal contributions every time you change job.

The main consideration though is to ensure you do not lose out on any additional employer contribution if they pay extra contributions linked to personal contributions. It is also worth comparing the terms of buying added years if the existing scheme offers this option .

This must bring an end to Freestanding AVCs so it may be time to look to consolidate these arrangements - particularly as many were set up on more expensive terms than are currently available.

Retirement Options

It is now possible to take 25% of the retirement fund as tax free cash (higher if you were eligible for tax free cash in excess of 25% of the fund under the old rules, and this level of tax free cash has been protected). It is now possible to take 25% tax free cash in respect of contracted out monies (protected rights).

An annuity is now named "secured pension". Income drawdown is now known as "unsecured pension". There is a slight change to how the maximum income is calculated under unsecured pension plans - there is no longer a minimum income requirement. This means that tax free cash can be isolated and taken earlier (irrespective of whether the member has retired), without having to take any income. Currently, the earliest age at which benefits can be taken is 50 0 moving to 55 by April 2010. Obviously benefits should only be taken early if there is a justifiable as this reduces your ultimate benefits in retirement.

In the past, under income drawdown, there was a requirement that an annuity must be purchased by the age of 75. It is now possible to avoid having to purchase an annuity, although the government have talked about this being a possibility only in the event of being a religious objector to annuities (I think I qualify coming from a long line of Plymouth Brethren!), although this restriction has not appeared in the final legislation.

There are different rules applying on reaching age 75 - the most important being the maximum income that can be taken is 70% of the maximum.

Although inheritance tax is potentially payable, on the second death, monies can at least be passed to other scheme members, that can include children, or other family members, as opposed to losing the monies to the insurance company.

Life Cover with Tax Relief

Having stopped the ability to take out a pension term assurance with the introduction of Stakeholder pensions, the government will now again allow life cover with tax relief. It is possible for the premiums to be paid, either personally or by an employer.

With effecting new life cover, it is worth looking at this alternative, due to the tax reliefs available. It may even be appropriate to review ordinary life insurance policies taken out over the last five years or so to see whether it would be cheaper to rewrite the policy with tax relief, although additional underwriting will be required.

One of the major advantages of writing the policy in this way is that the policy is automatically written in trust, without the need to set up an individual trust, with named trustees. The proceeds will automatically fall outside the estate for inheritance tax purposes.

----------//----------

So we now live in a simple pension's world - but there are further changes on the horizon. There are further government reviews underway, particularly in respect of State/employer pension provision. It is likely that by 2010 a new pension scheme will be in place, and both the employer and employees will be forced to contribute unless a suitable alternative is in place.

There are also changes likely to State benefits. There is the possibility that the old age pension will go up in line with national average earnings rather than inflation, but there will be a wholesale change of the State Second Pension (S2P) - this scheme only replaced SERPS a few years ago. It is likely that this benefit will move from an earnings related benefit to a flat rate benefit, probably providing the equivalent S2P pension for someone earning £18,000 per annum (if it does become a flat rate it is estimated that the flat rate top up to the basic state pension will be £135 per week by 2030). Therefore, anyone earning above this limit will see reduced benefits. There will be no reduction in national insurance contributions and the government are talking about ending the ability to contract out.

As ever, pension simplification is making life more complicated . This article is for guidance purposes only and financial advise should always be sought before making a final decision.