The government's “pension simplification” programme, which will replace the existing eight pension regimes with one set of rules, starts in April 2006 and aims to offer more generous allowances and bring new flexibility to the retirement system.

At the moment, if you've elected to take your pension by income drawdown, it is compulsory to purchase an annuity once you reach the age of 75. Under the new regime, however, you will be allowed to continue with income drawdown past 75 under a slightly more restrictive system known as an alternatively secured pension.

The income from this new pension will be up to a maximum of 70 per cent of a single life annuity based on age 75. The income will be reviewed annually and you'll be allowed to change the level of income each year or indeed purchase an annuity.

There are other changes on the horizon, too. Currently, you are allowed to make personal pension contributions of between 17.5 per cent and 40 per cent depending on age of your earnings up to £102,000 for the tax year 2004-05. Maximum retirement annuity plan (RAP) contributions as a percentage of earnings are lower than for personal pensions and range from 17.5 per cent to 27.5 per cent, depending on age. The earnings cap here doesn't apply, so there is greater scope for substantial investment if your earnings are higher. Employers can contribute to personal pensions, but not to RAPs.

Under the new regime, you will be able to contribute up to 100 per cent of your earnings with a maximum cap of £215,000 in 2006-07. The new regime also establishes an overall maximum “lifetime allowance” of £1.5m in 2006-07 for all your pension arrangements and a maximum tax-free cash limit of 25 per cent of the fund.

There are tax penalties if you

exceed these limits, but if you already have a large fund or a tax-free cash allowance you can apply to the Inland Revenue to have your pension fund ring-fenced so that these penalties do not apply.