January is a time to sweep out the old and ring in the new, never more so than this coming year and never more so than with pensions – it seems the New Year came early for Gordon Brown, if you consider the changes wrought a few months ago in the Finance Act that sweep away the many and varied regimes regarding pensions and bring in a unified, ‘simpler’ approach.

The current fragmented structure of UK pensions was undeniably in need of an overhaul; however, as is often the case, simplification tends to be paradoxically complex, at least in the short-term. So what are the implications for those Island residents who still have UK pensions? The big changes can be distilled into the four What’s: what you can put in; what you can take out tax-free; what you can invest in; and what you can do with it when you’re dead (not exactly full of New Year cheer, but a necessary consideration).

Taking each in turn, the first What – what you can put in. You will, from 6 April 2006 (deemed ‘A-Day’), be able to make a tax-relieved contribution up to the lower of your annual earnings or £215,000. This limit will be increased each year until it reaches £255,000 in 2010/11. So most people will be able to put more into their pensions, tax-efficiently, than they do at present.

However, contributions are ultimately restricted by the new Single Lifetime Allowance of £1.5m (for 2006/07), which effectively caps your pension fund. If your pension pot exceeds this figure when you retire then you may be taxed at 55 per cent on the excess, unless you have undertaken some planning beforehand and, if appropriate, registered with the Inland Revenue to protect your fund.

The number of people likely to be affected by this limit has been a hot topic in the UK, however, considering such a fund would currently buy an indexed joint income (retiring at 55 for him/50 for her) of around £50,0001, more people may be affected than previously thought.

Turning to the second What, what you can take out. While there is no maximum pension that can be paid out from a registered scheme, this Single Lifetime Allowance will affect the lump sum that can be taken. A new 25 per cent limit (applied to the £1.5m, or the amount of the fund, if lower) restricts such tax-free cash to a maximum of £375,000. If your old scheme allowed you to take out more than this then you will need to consider your options carefully in order to protect such a payment. It should also be noted that the earliest age for withdrawals will increase to age 55 from 2010.

What three introduces another significant change – what you can invest in. One major benefit of the new rules is that your pension fund will be able to invest in a wider range of assets, including residential property, and there are more options to help finance your business. This opens the possibility of investing in buy-to-let properties, as well as the family home, which radical move is most welcome.

This aspect of the regime, when combined with the new provisions that potentially allow you to pass on the balance of the pension fund and benefits to your dependants on death (the fourth What), opens up many new possibilities for succession planning, involving family assets, which might include the family business.

Those people in UK schemes who are considering retiring in the next five years, and companies who have employees within UK schemes, should be actively considering their options under the new regime. Under the transitional rules you can apply to have your current pension rights protected. However, such protection may not be the optimal solution for you, and it would be prudent to get tailored advice for your personal circumstances. In particular, if you are resident on the Island and are planning to retire here permanently then you might be considering transferring your pension to a local scheme before ‘A-Day’ (under the appropriate UK/Channel Islands transfer rules), which means you would not fall within the new provisions. However, it may be that the new UK regime is more beneficial and you would be best positioned by drawing from it as is, and relying on the local tax arrangements already in place, which prevent double taxation.

Whichever option suits you, it is better not to delay your decision until another year has passed. While the ‘A-Day’ changes don’t sweep in for another 15 months, this year brushing up on your pension position should be a resolution you actually keep!