Pensions payment restrictions

A-day’s 25% lump sum rule could restrict payouts to holders of retirement annuity contracts – a type of individual pension plan that existed before 1987 when personal pension plans started to appear.

Chris Bellers, pensions technical manager at provider Friends Provident, said: "In some cases they could lose out. [Such contracts], also known as s.226 contracts, allow up to three times the initial annual annuity to be taken as tax-free cash."

Those wanting to maintain their entitlements and who are eligible for retirement could choose to retire before A-Day, but they may find that they have less cash left for an annuity.

The other factor that needs to be considered is retirement age. Under A-Day rules, pension scheme members will be allowed to take benefits from 50 years of age, but there is a strong disincentive for annuity contract holders.

Bellers explained: "Many s.226 contracts contain an annuity guarantee if benefits are taken at a selected retirement age which, before April 2006, cannot be lower than 60."

If the pension is taken early, scheme members may forfeit their guarantee and be exposed to prevailing annuity rates.