The world of pensions is not known for its simplicity. So the fact that the Inland Revenue is untangling the complex rules concerning tax on retirement income is to be welcomed.

The biggest change in the UK pensions system for half a century comes into effect on April 6, 2006 - otherwise known as 'A-Day'. As well as scrapping the current limits on how much you can pay into your pension each year, the changes are designed to give greater flexibility and choice over when people retire and how their pension pots are built up.

Those who are to retire in the next few years will be most affected, along with people with above and below-average pension pots. However, anyone with a personal pension should find out if they need to take any action, as there are potential downsides to the new changes that could cost them dear.

Tony Attubato at OPAS, the Pensions Advisory Service, said: 'As a rule of thumb, individuals who currently have earnings of more than £70,000 are most likely to be affected.'

'However, even if someone has pension rights under the lifetime allowance, they may have a right to a tax-free cash sum higher than 25% of the capital value of their pension.

'In such circumstances, the cash sum built up before April 2006 will still be protected. The protection is lost, however, if they subsequently transfer to another pension plan.'

A-Day - the main changes

Contributions

At the moment you can contribute between 17.5% and 40% of your salary into your pension, depending on how old you are. From April 6 you will be allowed to invest up to 100% of your earned income annually, up to a ceiling of £215,000. This figure will rise in line with inflation.

Drawing your pension

You will be able to draw your occupational pension from your employer while continuing to work.

Small pension pots

After A-Day, individuals with pension pots of less than £15,000 can take the money as a lump sum rather than converting it into an annuity. However, this rule applies to the totality of the fund. In most cases, the fund will actually exceed £15,000