New restrictions to pension relief

November 2010

In our September 2010 newsletter we advised readers of a consultation with Government that may eventually mean you are not required to cash in your pension fund for an annuity when you reach age 75 years. These consultations are still ongoing.

The purpose of this article is to warn readers of new restrictions to the amount of tax relief you can achieve from making pension contributions. The changes were announced by the Treasury Secretary on the 14 October 2010.

There are two principal changes:

1. From April 2011 the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000. This is a significant reduction that is targeted to affect 100,000 pension savers, 80% of whom will have incomes over £100,000.

Tax payers who are likely to be affected should revisit their personal tax planning for 2011-12 and beyond with some urgency. There may still be other planning opportunities that can be utilised to minimise the impact of loss of personal allowances and the 50% income tax charge.

2. From April 2012 the lifetime allowance will be reduced from £1.8m to £1.5m.

Apparently there will be provisions introduced to protect the pensions savings of individuals whose contributions "spike" in one year by enabling them to utilise unused allowances from previous years.

These two proposals are the outcome of a consultation on the overall simplification of the tax rules that apply to pension contributions. It is likely that formal legislation will be included in the 2011 Finance Bill.