AMID all the hype about houses and racehorses, the key changes to our retirement system are being somewhat ignored. A-Day on April 6 will bring the biggest shake-up of the tax issues surrounding pensions in decades. Every one of us with a pension plan will feel the effect of these changes.

Over the years, tinkering by successive governments has created a hotchpotch of rules and regulations. The new tax regime for pensions is intended to be more straightforward.

There will no longer be any restrictions on the types of pensions into which you can pay contributions. At present, employees in occupational schemes and earning more than £30,000 a year are not allowed to contribute to, say, a self-invested personal pension (Sipp). After A-Day they will be able to pay into more than one pension simultaneously.

After next April pension contribution limits will be the same for everyone, no matter what type of pension they have or how many they contribute to. The contribution limit will be 100 per cent of annual earnings, up to an annual maximum of £215,000 for the tax year 2006-07. The maximum limit will rise to £255,000 by 2010. This limit will also cover any contributions made by employers.

Stephen Herring, tax partner at BDO Hayward, the accountant, says: “The raising of the annual contribution limit will probably be the most useful change for most people. If someone were to receive a small lump sum, such as an inheritance or payout from other savings, it would be possible to recycle it into a pension and receive added tax relief.”

The change is particularly advantageous for higher-rate taxpayers because they will receive 40 per cent tax relief on their pension contributions. Mr Herring says: “I think that higher-rate taxpayers will be doing their best to maximise their contributions in the next tax year as there is always talk of tax relief being reduced to basic-rate taxpayers only. The Chancellor may be more inclined to do this after he sees the scale of the contributions made under the new rules.”

The changes also throw up some interesting ways to boost your pension at little cost. Mike Warburton, of Grant Thornton, another accountant, says: “One way of boosting your pension after A-Day will be to make use of the

25 per cent tax-free lump sum that you can take from your existing pension arrangements. At present, when a lump sum is taken, a pension has to be drawn at the same time. But after next April it will be possible for the remaining fund to be left invested. The tax-free cash can be ploughed back into your pension again, but this time with the addition of tax relief.”

This means that someone with a £50,000 fund could take £12,500 as a lump sum (reducing the remaining fund to £37,500) and reinvest it. Together with 40 per cent tax relief, this would push up the fund’s value to £58,333 at no personal cost.

Mr Warburton believes that an even better way is to borrow the extra contribution first. In this case, someone with a pension fund of £50,000 could borrow £35,714 to add to their pension, making a total fund of £85,714, take tax-free cash of £21,429, which together with 40 per cent tax relief would exactly repay the original borrowing, leaving a fund that has grown from £50,000 to £64,286.

Another feature of the new rules is that there will be a lifetime limit on the total amount that you can have in your pension pot. This starts at £1.5 million for the 2006-07 tax year, rising to £1.8 million by 2010-11. Any fund exceeding this will be taxed at 25 per cent if benefits are taken as income or 55 per cent if taken as cash.

• For more on pensions, visit www.timesonline.co.uk/pensions

  The good, the bad, the ugly

  The good:

  Breathless declarations that Sipps allow property purchase at a 40 per cent discount and free investors from boring pension investments are undeniably attention-grabbing, writes Helen Monks. But amid the hype there is concern that the Financial Services Authority (FSA) has no powers in this area.

  The bad:

  A Sipp is just the “wrapper” for pension investments and is not regulated by the FSA, the chief City watchdog. Confusingly, the FSA does have a remit to regulate some of the investments inside a Sipp. The FSA says that the Government is proposing that it regulates Sipps from April 2007. In the meantime, advice on joining a Sipp or choosing unregulated investments to hold within one is unregulated.

  This means that not all Sipp investors have access to FSA protection and will be denied access to the Financial Ombudsman Service and the Financial Services Compensation Scheme.

  The ugly:

  The lack of FSA regulation means that there are no restrictions on Sipp advertising. Some property companies have launched aggressive campaigns around Sipps. Iain Oliver, head of pensions at Norwich Union, says: “We are concerned that some of the marketing of Sipp investments is too simplistic for what is a very complex decision with long-term implications.”

  A recent report by the Royal Institution of Chartered Surveyors (Rics) also gives warning of the possible mis-selling of “property pensions”. Louis Armstrong, of Rics, says: “Investors should be selective and take proper professional advice.”

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