News & views
News & views
These pages are prepared exclusively for our professional contacts.
We will provide you with our insight on financial issues and update you on key developments at Towry.
If you have any questions, please speak with your usual Towry contact or, to request further information, info@towry.com.
21 October 2010
Restricting Pension Tax Relief from April 2011
In June this year the Government announced that it was undertaking a review of legislation passed by the previous Government to restrict pension tax relief for high earners that was due to come into effect from April 2011. The Treasury has now formally announced these changes and published draft legislation that will form part of the 2011 Finance Bill, to take effect from next April.
The annual allowance
There will be a new annual allowance on pension contributions of £50,000 pa which will apply to everyone irrespective of their earnings. The Government estimate that 100,000 pension savers will be affected by the new rules with 80% of these currently earning over £100,000 pa.
Tax relief at the individual's highest marginal rate will be available on all personal contributions within the annual allowance (and not capped at 40% as previously suggested). No tax relief will be available on contributions above this amount.
An individual may carry forward any unused annual allowances from the previous three tax years to the current tax year. The unused allowance in this sense is the difference between the contributions made and the new level of £50,000. However, the draft legislation states that unused annual allowances can only be carried forward from years in which the individual is a member of a registered pension scheme. We await further clarification as to whether a contribution must be made during this period.
The exemption from the annual allowance test for contributions made in the year that benefits are taken (final year) will be removed. The Government is keen to address issues around taking benefits because of ill health and death and will look to exempt these from the test. However, this will not help those who may have been looking to make a significant contribution as part of an exit strategy or in lieu of bonus.
Defined benefit schemes
The factor for valuing annual increases in defined benefit scheme pensions will remain, but is to be increased from 10:1 to 16:1. This will mean that an increase in an annual pension of £1,000 will be valued at £16,000 instead of £10,000.
Inflation will be excluded from defined benefit pension calculations; previous years accruals will be revalued in line with inflation before subsequent testing. Deferred members will be excluded from the test against the annual allowance. This approach seems sensible in ensuring that tax is not paid on accruals solely caused by inflation.
The lifetime allowance
Another significant change will be a reduction in the lifetime allowance from the current £1.8m to £1.5m, to take effect from April 2012.
However, the Government acknowledges that individuals with pension savings exceeding this lower lifetime allowance should not be disadvantaged; there will be protection for those with existing pension funds between £1.5m and £1.8m and for those who previously registered for primary and/or enhanced protection following the pension changes that came into effect in April 2006.
The valuation factor for valuing defined benefit scheme pensions against the lifetime allowance is to remain at 20:1 but will continue to be monitored.
The maximum tax-free lump sum will remain at 25% of the lifetime allowance or the size of the fund if lower. It is encouraging to see comment that the tax free lump sum is regarded as an important and desirable element of pension benefits in the long term.
Trivial pensions
The trivial pension limit will remain at the monetary amount of £18,000 rather than 1% of the lifetime allowance and will therefore not be linked to any future changes in the lifetime allowance. This will ensure that those with limited overall pension savings will not be further restricted in their ability to commute their pension as a lump sum.
Other remuneration structures
Legislation will be brought forward to ensure that employer funded retirement benefit schemes (EFRBS) and employer benefit trusts are no more attractive than other forms of remuneration.
Action
These changes are far reaching and will have an impact on most individuals who are currently making pension savings. Existing arrangements should be reviewed to establish whether more tax relief or higher contributions are possible under the new rules or alternatively whether tax charges will be triggered by them. While the changes largely take effect from April 2011 some effects are immediate and so may need assessment. Overall the landscape for long-term retirement planning is changing and appropriate alternatives to pensions will need to be considered.
If you would like to learn more, please speak to your usual contact at Towry.
Disclaimer
For Professional Adviser Use Only
