How the new pension rules affect you

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The biggest changes to Britain's pension system in decades - known as A-Day - came into effect in 2006 and the new rules have a major impact on almost everyone.

If you have a pension or are planning to get one, this revolution is of major importance to your plans for a financially secure future.

For most people, the new rules mean greater flexibility over how and where they can save.

Here are the main changes that will affect how you plan for your retirement.

Contributions

Old rule: You could contribute anything between 17.5 per cent and 40 per cent of your annual earnings into a pension, depending on your age.

New rule: The maximum you can contribute has risen to £215,000. Even with no earnings in any tax year, you can still contribute up to £3,600; though if you work, you can't pay in more than your annual salary.

This change enables you, for example, to pay your full annual salary into your pension - benefiting from the tax-relief paid on contributions - while living off savings.

Tax-free lump sums

Old rule: The company pension rule meant that you were only able to draw up to 1.5 times your final salary as a tax-free lump sum.

New rule: You are now able to draw up to 25 per cent of the value of your pension fund as tax-free cash. The rule also applies to any AVCs (Additional Voluntary Contributions) you have made.

Age at which pensions can be taken

Old rule: The threshold at which you could start taking pension benefits was 50.

New rule: This age limit is rising to 55 by 2010.

Pension size

Old rule: There was no limit on the size a pension fund's value could grow to.

New rule: The maximum value your pension pot can reach before the remainder is taxed is £1.5million in 2006-07 (rising to £1.8million in 2010-11).

This isnÂ’t likely to trouble most of us, but those whose pensions are worth more have to pay tax at 55 per cent on the excess.

For final salary schemes (where your pension depends on how much youÂ’re earning at the end of your working life), the value of the pension pot is determined by multiplying your pension income by 20.

For example, if your final salary pension is £10,000 a year, your pension fund is deemed to be valued at £200,000.

Working and drawing a pension

Old rule: You had to stop working before taking benefits from a company scheme (not from a personal or stakeholder pension).

New rule: You can continue working and draw benefits, even for the same employer. You donÂ’t have to take all the benefits at the same time.

Annuities (pension income)

Old rule: After reaching 75, you were forced to use your pension pot to buy an annuity, if you hadn't done so before then (annuities provide a fixed or variable income for life, depending on which type you buy).

New rule: You are no longer obliged to do so and can choose from more flexible alternatives.