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Pension Simplification is the name given to a series of changes that came into force on the 6 April 2006 (known as A-day) that have been introduced by HM Revenue & Customs (HMRC).

The key changes are as follows.

Cash Lump Sums

From 6 April 2006, the maximum tax-free lump sum available will be 25% of the value of retirement benefits, up to an overall limit of 25% of the "Standard Lifetime Allowance". This Standard Lifetime Allowance will be £1.5 million for the tax year 2006-07. For 2006-07 the maximum tax-free cash will be £375,000.

Also, from 6 April 2006, it is possible to take tax-free cash from pension savings that have built up as a result of paying additional voluntary contributions (AVCs). Currently, this option is not available for people who started paying AVCs after 8 April 1987.

The changes mean that most members will be able to take more tax-free cash than is currently permitted. Taking more cash will have a consequential impact on the amount of pension paid.

Claiming a Pension and Working for BT

Under the new framework it will be possible to draw a pension and continue working for BT.

As an alternative to drawing full benefits, the new legislation will also allow members to draw part of their pension benefits whilst continuing working for BT, and defer drawing the other part until a later date.

BT will allow members to draw the funds represented by their own contributions (including AVCs), in the case of BTRP, and AVC funds in the case of BTPS, to purchase retirement benefits (i.e. pension and tax-free cash), while continuing to accrue main scheme pension benefits.

Minimum Retirement Ages

There will be no change in the normal pension age of 60. However, as a result of changes in the law the minimum age at which a pension can be taken in the BTRP and SLFPP will rise from 50 to 55 in 2010.

The BTPS is classified as a "protected pension scheme" and therefore it will be possible to continue taking a pension from the BTPS from age 50 beyond 2010.

Taking pensions early will have an impact on the amount of pension payable, which will be actuarially reduced. Pensions can be paid from any age on ill health grounds.

Maximum Contribution Levels

The maximum limit on pension contribution by scheme members of 15% of earnings will be abolished. From 6 April it is possible to pay up to 100% of earnings into a registered pension scheme, including AVCs.

Children's Pensions

To comply with the new legislation, any new children's pensions that come into payment from 6 April 2006 will have an upper limit of age 23, this is a reduction from the current age of 25. The upper age limit of 23 will not apply in cases of disability.

Children's pensions already in payment at that date will continue under the current terms.