Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Pensions allowances curtailed

15 October 2010
Issue: 4277 / Categories: News
Reduced to £50,000 p.a. with effect from April

The annual allowance for pension saving will be reduced from £255,000 to £50,000 with effect from April 2011, and the lifetime allowance will be reduced from £1.8 million to £1.5 million from April 2012.

The changes replace the proposals legislated for by the previous government in the Finance Act 2010. With the intention of protecting individuals who exceed the annual allowance due to a one-off spike in accrual, the Government will allow them to offset the amount against unused allowance from previous years.

In addition, there will be a flat factor of 16:1 to value defined benefit pensions for the annual allowance test, and it will not apply in respect of ill-health early retirement and deferred members.

‘The introduction of the new system of pension tax relief in place of the higher income access relief charging provisions is welcome,’ said Neville Bramwell, a tax partner in the Deloitte pensions advisory team. ‘This alternative approach of a reduction in the annual allowance means everyone, regardless of how much they earn, will be able to make tax efficient pension contributions.’

He said the new limits were unlikely to affect individuals earning less than £100,000 a year, but added, ‘Long-serving participants in generous final salary schemes could be affected at lower salary levels – perhaps down to £70,000 per annum.’

While the changes are relatively simple for taxpayers in defined contribution schemes, Mr Bramwell said, ‘‘The position is more complicated for those in final salary schemes, who will face tax charges should the value of their pension benefit increase by more than £3,125 pa. Pension schemes will need to provide information to their members, so that tax due can be calculated’.

Also welcoming the changes, Aon Hewitt’s Tony Baily said, ‘We are pleased that the Government has listened and responded to some of the industry concerns. Given the limited time for the changes to be implemented, as simple a regime as possible was called for and the Government has responded to this in its proposals.

‘The higher than previously proposed annual allowance and a relatively low valuation factor mean that the winners are long-serving, middle-income earners in defined benefit plans, many of whom will now not be affected by the annual allowance. The losers are high pension savers who get caught by the reduced and frozen lifetime allowance.’

With regard to the proposals offering an exemption for ill-health retirees and the ability to carry forward unused allowances for up to three years to deal with irregular pensions saving, Mr Baily suggested these could ‘also open the way for a more structured approach to pension planning for many individuals’.

However, given that the new annual allowance comes into place in April 2011, June Grant, principal consultant at Aon Hewitt, said employers ‘will first need to identify which employees are affected now and which further ahead.

‘They will then need to revisit their reward strategies to decide whether those senior people should be allowed to select alternative compensation or, where available, other approaches to pensions for retirement saving to avoid paying double tax. Employers do not have long to decide on their approach and then to communicate it so that key staff can make informed decisions ahead of April.’

Issue: 4277 / Categories: News
back to top icon