Taking Account

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  • Taking Account

More changes to pensions

November 2010

As part of the Government's tightening of the purse strings it was announced that the amount of pension contribution on which tax relief is available will be reduced. The introduction of the reduced limit is expected to save the Government £4bn a year.

Currently there exists an annual limit of £255,000 on which tax relief is available, this will be reduced to £50,000 from April 2011. Many pension consultants were expecting the amount to reduce even further to around £40,000.

The Government has stated that this will affect 100,000 people although commentators say it will be many more. Although the majority of pension savers won't be affected by the change, it will raise concerns for some. Those that could be impacted by the change include:

• Business owners who use the sale of a business to fund retirement.
• Those on fluctuating incomes who may make large one off payments into pensions.
• High earners whose annual pension contribution is in excess of £50,000.
• Those close to retirement topping up a pension with a redundancy lump sum.

Some good news is that this cut hasn't gone as far as some thought it might with no reduction in higher rate tax relief for high earners. There were some concerns that the Government would level out tax relief on pensions at 20% for everyone.

In addition to this change, the Government has also stated that it intends to reduce the total amount an individual can save over their lifetime whilst attracting tax relief to £1.5m, down from £1.8m. This change is due from April 2012 although there are likely to be some transitional arrangements for those with pension pots between £1.5m and £1.8m.

Carry-forward is being re-introduced to help smooth the impact of 'spikes' in pension savings. It will be possible to carry forward unused allowance from up to three previous years to offset against the contributions above that years allowance on an assumed allowance of £50,000 for tax years 2008/09 – 2010/11. Furthermore, the process will be automated, negating the need to complete a tax return to use carry-forward.

The Government also confirmed that:
It will NOT cap pension tax relief at 40%

• The lifetime allowance valuation factor for defined benefit schemes will stay at 20
• The lifetime allowance charge will stay as at present (55% if paid as a lump sum and 25% if paid as a pension on top of marginal rate tax on the pension
• The maximum tax free cash will remain at 25% of the standard lifetime allowance

Hilton Sharp & Clarke