How much is a pensioner allowed to have in the bank?

u.k. pensions
Answer:    Pensions are not popular in the UK. Poor performance, tough exit penalties and a string of scandals have eroded many people’s confidence in the sector. Yet at the same time, increasing longevity and an ageing population mean that it has never been more vital to save. The sweeping changes to pension rules due to come into force in April 2006 demonstrate the Government’s desperation to get us all to do so. As of A-Day - as 6 April 2006 has been dubbed by the Inland Revenue - there will be just one set of rules governing all types of pension plans. The rules will offer a lot more flexibility and provide new opportunities for those who have hitherto shunned the sector; residential property, works of art and fine wine could, for example, all suddenly become part of your pension.

Although the final rules will remain unknown until the publication of the Finance Bill 2005 later this year, the main principles of the reform and much of the detail is already known. And while these rules have not yet become law, if you don’t get to grips with them in advance, you could lose out.

Here’s how the whole thing will work. From 6 April 2006, the existing eight sets of tax rules for different kinds of pension will be scrapped and replaced with a single set for occupational and private pensions. Of the many proposed changes, those likely to be of greatest interest, says Pamela Atherton in The Daily Telegraph, include the ability to hold residential, in addition to commercial, property in a Sipp (a self-invested personal pension); the potential to avoid compulsory annuity purchase at the age of 75; and the opportunities for inheritance tax (IHT) planning. The main changes to be implemented are outlined below.
Lifetime allowance

A new lifetime allowance is being introduced, which will cap the total value of individual pensions at £1.5m from April 2006, rising to £1.8m by 2011. Anything in your fund that exceeds the limit at the time of your retirement will be taxed at a punishing 55%. If you have already exceeded this limit - or are likely to do so by A-Day - you should take steps to protect your money. You have two options and can register for them until 2009. If you have pensions savings already worth more than £1.5m, you can register for ‘primary protection’. This will protect you from the 55% recovery tax and also allow you to top up your fund by the equivalent percentage increase in the Lifetime Allowance in the years leading up to your retirement. Alternatively, anyone can register for “enhanced protection”. This may be useful if your fund is currently below the £1.5m limit, but you expect it to have grown substantially above the ceiling by the time that you retire. No recovery tax will apply, as long as you stop contributing to your pension on A-Day.

Read more about this here:

For more than 80 years, valuable tax relief has been available for individuals and companies willing to put money aside in a pension scheme. Pension savings offer significant tax advantages, including:

* pension contributions are deductible against income or corporation tax
* investment income and capital gains, inside the pension scheme, roll-up tax-free (although dividends on shares have been taxed since 1997)
* at retirement, part of the pension scheme may be drawn as a tax-free lump sum
* lump sum benefits payable on death are normally free of inheritance tax.

About 30 years ago people started using 'do-it-yourself' pension arrangements so that they could take advantage of this favourable tax position and yet keep control of the investment of their retirement funds. Since 1975, Small Self-Administered Pension Schemes (SSASs) have allowed family companies to run their own pension scheme and there are now more than 30,000 of these schemes in existence. It is estimated that more than a third of these are investing in commercial property.

Personal Pensions were introduced in 1988 and since about 1991 Self-Invested Personal Pensions (SIPPs) have been popular.

All do-it-yourself pensions, SSASs and SIPPs, may invest in commercial property, subject to particular rules set out by HM Revenue & Customs. Many people see the prospect of investing in bricks and mortar for retirement as highly attractive. In this booklet, we cover the requirements of the Revenue relating to funding and investments and also general prudent considerations when investing in commercial property.

Barnett Waddingham has been closely involved with the development of self-administered pension schemes since 1988. If you are considering taking advantage of the opportunities, we hope this page and booklet (the full version of this page can be found on this booklet), and our companion booklet on Member Directed Pension Schemes which deals with both SSASs and SIPPs will answer many of your questions.


How big a contribution can I pay into my pension scheme?

From 6 April 2006, the contribution limits into registered (that is tax-approved) pension schemes are very high. First, any individual will be able to contribute in any year an amount up to 100% of their earnings. There is a limit for tax year 2006/7 of £215,000. Companies may pay contributions in excess of 100% of earnings for their employees, but if the total contributions in any year from the member and his company combined exceed £215,000, then the excess will be taxed on the member as a P11D benefit.

The limit of £215,000 will be increased each year and we already know the figures that will apply up to 2010/11.
Tax year Annual contribution limit

Your contributions will be allowed against income tax up to the limit of 100% of earnings. There is no limit on company contributions, although the actual tax deductions for a company will depend on the attitude of the local Inspector of Taxes.

How do I actually get the tax relief?

If your employer is making the contributions, these will be deductible against the company's corporation tax bill. When an individual makes the contributions, basic rate tax relief will be reclaimed by the pension administrator, and higher rate tax relief (if applicable) will be claimed by you yourself.


Suppose a top-rate taxpayer wants to put £10,000 cash into his pension scheme. The SIPP administrator reclaims 22% basic tax and so gets £2,820.51 from the Revenue. The total contribution into the pension scheme is £12,820.51. The member can then reclaim the higher rate tax relief (18%) himself. This will be worth £2,307.69 and does not form part of the pension contribution.

Can I pay next year's contribution early to increase the fund available for investment?

You will only get tax relief on your contributions in the year that they are paid. However, as mentioned later, you may lend money to your own pension scheme (but this would form part of the limit of 50% on borrowing).

You may pay contributions before 6 April 2006 but the limits are lower than those described above and you should ask for specialist advice.

How quickly can a SIPP be set up?

It will normally take one to two weeks, but it is prudent to allow a month so that there is ample time for all the details to be covered carefully. However, more time should be allowed, perhaps up to three months, if you are intending to transfer other pensions into your new self-administered arrangement. A SIPP may normally be set up by the completion of a simple application form.


Do I need to sell assets when I retire?

No. It is quite possible that many people will decide to keep their pension scheme investments into retirement. This will mean they draw the investment income generated as their pension rather than buying an insured annuity. Although the investment income is tax-free to the pension scheme, any amounts drawn as pension will of course be subject to income tax in the normal way.

So, my pension is taxable?

Yes, but there is no National Insurance.

What happens if my pension scheme exceeds the Lifetime Allowance of £1.5m?

If at retirement your total pension schemes exceed the 'Lifetime Allowance' (£1,500,000 for 2006/2007) then 'Recovery Tax' will have to be paid on the excess (but there will be some exemptions from Recovery Tax).

Will the Lifetime Allowance of £1.5m increase over time?

Yes. We know already what it will be for the next five years:
Tax year Lifetime Allowance

The Lifetime Allowance will be reviewed every five years thereafter but we do not know yet how it is likely to be increased (but most expect it to increase in line with price inflation).

Will I have to pay the new 'Recovery Tax' of 25%?

Yes, if you are not exempt at 6 April 2006 and at the point of retirement the total value of all your pension schemes exceeds the Lifetime Allowance above.


If you were retiring in the year 2006/7 and the total value of your pension benefits was £1.6m in that year, then you would have exceeded the Lifetime Allowance by £100,000. There would be a tax of 25% of this excess, namely £25,000.

Who will be exempt from the Lifetime Allowance at 6 April 2006?

Those people who already have pension values in excess of the limit, or indeed those who are close to the limit and think that with good investment performance they will quickly reach it, may ask for enhanced protection (which must be done within three years of 6 April 2006). This means that, provided they promise not to make any new contributions to any of their pension arrangements after 6 April 2006, the Lifetime Allowance will not apply to them.

Can I take part of my retirement benefits as a tax-free lump sum?

Yes. The tax-free lump sum at retirement will normally be 25% of the value of the fund up to the Lifetime Allowance.


If your fund is £500,000, you could expect the tax-free lump sum to be £125,000.

Can I take retirement at any age?

No. From 6 April 2006 benefits cannot be drawn earlier than the age of 50 except in circumstances of ill-health. This minimum age is being increased from 6 April 2010 to 55.

Do I have to stop work in order to draw retirement benefits?

No, this is not necessary. You can start to take your lump sum and/or your pension whether or not you are still earning (but subject to the age requirement mentioned above).

Can I take my lump sum on retirement and not the pension?

Yes. From 6 April 2006 retired members, including those who have drawn the lump sum, may in any year reduce the amount of pension they draw from the fund to zero.

So how big will my pension be?

The amount of insured pension you could buy will depend on the cost in the market place. Similarly, there is a limit as to how much pension you can draw direct from your own fund and it is related to the cost of pensions in the marketplace.


Suppose that, after you have taken your lump sum benefit, there remains £400,000 in the pension scheme. It would be necessary to determine at that time how much pension £400,000 could provide in accordance with rate tables calculated by the Government Actuary's Department (GAD) and this might be, say, £20,000 per annum. Armed with this information, and as an alternative to actually buying an insured pension, you could draw down from the pension scheme each year as your taxable pension anything between zero and 120% of the pension calculated from the GAD tables, namely £24,000 per annum in this example.

And does this situation prevail throughout retirement?

No, only up to age 75. From that age, rules for drawing down pension get much stricter and you would only be allowed to draw down up to 70% of the pension for a person of 75 (regardless of your actual age) calculated from the GAD tables.

Why is the draw down limit stricter from the age of 75?

This is a condition imposed by HM Revenue & Customs on those schemes that choose not to buy the security of an insured pension. It is presumably the intention that this makes it more likely that the pension scheme will not be exhausted before the pensioner's death.

Do I have to sell my pension scheme assets at age 75?


Does anything else happen at 75?

Yes, under the latest Revenue announcements, they are suggesting that those people who choose not to buy an insured annuity at retirement will have to resubmit the value of their pension benefits to a test against the Lifetime Allowance at age 75 and so the possibility of further recovery tax at 25% does arise, unless enhanced protection has been elected.

How long can I continue to hold the assets in my pension scheme after I retire?

This is up to you and, because you do not now have to buy an insured annuity at 75, it could be held until your death at any age.

Who would pay my pension if there was no investment income coming into the pension scheme?

This could well happen and is one of the snags of investing in property. Pension payments can be made from other liquid assets, although this will obviously deplete the fund. It would be possible to raise a further mortgage on the security of the assets but those concerned would have to be confident that this was sensible in the circumstances. This is why the Government points out that the only way to ensure a secure income in old age is to buy an insured annuity.

When I retire, can I take assets back as part of my pension benefits?

Yes, provided the figures work out.


The maximum lump sum benefit that can be taken is 25% of the fund and this may be rather less than the value of the asset required (for example, a property). If you are willing to take out a personal mortgage to make the difference, there is no ban on you buying the asset back from the pension scheme.


What would happen to the pension scheme assets on my death?

This will depend very much on circumstances and upon the benefits that the pension scheme trustees would want to pay out on the member's death. Benefits could take the form of a partner's or dependant's pension or, if death occurs before age 75, a lump sum. In the cases where families want benefits to be paid as a lump sum, it will normally be necessary for illiquid assets such as property to be sold. It would be advisable for life insurance to be taken out by the pension scheme to allow the trustees to make the payment of some benefits quickly, bearing in mind that property investment particularly can take many months to realise.

How does my partner get a death benefit without waiting to see if some assets prove difficult to sell?

As written above, if there are no free assets in the pension scheme, it may be prudent for the trustees to arrange for additional insurance on the pension scheme member.

Is there any tax to pay on death benefits?

On the death of a member, any pensions paid to partners or dependants will be subject to income tax in the normal way. The treatment of lump sum death benefits is different. If the member has died before starting to draw any benefits (pension or lump sum) from the pension scheme, then the lump sum death benefit will normally be free of income tax and free of inheritance tax. If death occurs after the member has started to draw benefits but before age 75, then there will be no inheritance tax but there will be a special 35% tax. The Revenue does not permit the payment of a lump sum death benefit on the death of a member after age 75.

So what happens to the fund if I die after age 75?

If you leave a partner, or other financial dependant, then a pension can be paid to them. If there is no such dependant, or on their subsequent death, we understand that the remaining funds can remain within the scheme to provide retirement benefits for your family members, but the amount remaining would be assessable to Inheritance Tax. If the remaining funds are instead paid to a registered charity there will be no Inheritance Tax assessment.


What investments are allowed?

You can decide an investment strategy most suited to your own circumstances. There are many investment opportunities, although there are some restrictions imposed by the Revenue. Acceptable investments include:

* Stocks and shares quoted in the UK and overseas
* Unquoted shares
* Unit Trusts, Investment Trusts and OEICs
* Insurance company funds
* Deposit Accounts
* Commercial Property, including syndicated properties

Investment transactions with any person 'connected' with you are allowed but these must be undertaken on commercial 'arm's-length' terms supported, where appropriate, by independent valuations.

What investments are not allowed?

Residential property (including land for residential property development) Personal chattels - for example, works of art, antiques etc.

Can my pension lend money to my company or partnership?

No. This is not allowed.

How does my pension scheme buy stocks and shares?

Your pension scheme can buy stocks and shares directly, either on your own advice or with the advice of a stockbroker or fund manager. You may wish to use the investment experience of a fund manager by buying Managed Funds or Unit Trusts. Unlike conventional insurance policies, the investment returns are easily measured and investments can be easily switched or moved into cash.

You can also access a wide range of pooled pension funds via a 'fund supermarket'. The initial and ongoing costs associated with this method of accessing the chosen investment funds can be extremely attractive, when compared with other investment routes depending on the terms offered by your SIPP provider.

What happens to any cash holdings in my pension?

Your SIPP will have a bank account to which you will normally be a signatory. The rate of interest will depend on the terms offered by your SIPP provider.


How much will my Barnett Waddingham SIPP cost?

Barnett Waddingham has much experience in administering SIPPs and SSASs invested in property. Our professional fees are competitive and the current establishment fee for a SIPP is £425 plus VAT and the minimum annual fee is £450 plus VAT.

Costs for a property purchase are on a time spent basis, and can range from £400 for a straightforward purchase with no borrowing, up to £1350 for a joint purchase between 2 SIPPs with associated borrowing.

For more details and without obligation, please contact any of our offices mentioned at the bottom of this page.


Barnett Waddingham LLP

Barnett Waddingham LLP acts as the Administrator of the BWSIPP. We have considerable experience of acting as professional trustee to both SSASs and SIPPs.

HSBC Private Bank (UK) Limited

HSBC is the Provider of the BWSIPP as required by HM Revenue & Customs. They offer banking facilities to all our clients. Each SIPP has a current account and you are a signatory on the account together with the professional trustee. The account currently pays interest at 0.25% below Bank base rate. Where there is a joint property purchase an additional bank account will be set up in respect of the joint owners of the property. This account will be used for all income and expenditure in respect of the jointly owned property and will be shared by the members in the same proportion as the property shareholding.

BWSIPP Trustees Limited

BWSIPP Trustees Limited act as the professional Trustee of the BWSIPP. They are a non trading company wholly owned by Barnett Waddingham set up especially to act as a Trustee to your BWSIPP together with yourself. If you wish you can appoint a third Trustee who is known to you to act on your death with BWSIPP Trustees Limited.


Pensions and property are both complex subjects - together there are many pitfalls. We hope this page and booklet has made things clearer for you. However, a page and booklet like this can only provide general information. It cannot provide complete or specific advice to meet your particular circumstances. Please contact the pensions expert in your nearest Barnett Waddingham office if you would like further details. We will be delighted to help.

* In Amersham - Adrian Waddingham or John Landon
* In Cheltenham - Julia Bassett or Claire Morley
* In Glasgow - Dot Clark
* In Leeds - Richard Millson
* In Liverpool – Pauline Berry or Lisa Butler
* In London - Clive Grimley or Paul Leandro
Most pensions are not asset-dependent. How much you have in the bank doesn't matter.
Pensions are usually an employer sponsored benefit and not a welfare program. As such they should not be dependent on your assets, but length of service, job title/level, etc.
You can have as much money as you like in the bank, whether as a current account or savings or whatever.
I think you might be worrying about means tested benefits or tax credits. IF you claim a means tested benefit or tax credit, these are reduced if you have a lot of money in the bank
Income support is for living off, and will be reduced if you have more than approx 3,000 pounds in the bank - the government feels that you should use your savings to live off, but if you spend it all in a splurge to get rid of it, they will penalise you - so dont go on a world cruise !
Tax credits are more complicated, you would need to get qdvice about how much you can have in the bank before it reduces credits, the DWP does a good leaflet about pension credits
Hope that helps