Future Pension Changes

The uncertain situation over the tax relief on pension contributions finally appears to be over. The Coalition Government considered that legislation passed by the previous Government was too complex. That legislation involved charging high earners with an additional income tax charge in respect of their total pension contributions from 6 April 2011.

However, the Government had also made it clear that some form of restriction/charge relating to the tax relief on pension contributions would proceed as the measures were budgeted to be worth up to £3.6 billion per annum once established. A consultation period followed and now the Financial Secretary to the Treasury, Mark Hoban MP, has announced that the annual allowance for pension saving will be reduced from £255,000 to £50,000 from 6 April 2011. He said:

‘We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. The Coalition Government believes that our system is fair, will preserve incentives to save and – compared to the last Government’s approach – will help UK businesses to attract and retain talent.’

This means that those who are most able to make significant pension savings will still be the primary target group. Where the annual allowance is exceeded a tax charge may apply (but see later). This is generally likely to be 40 or 50% of any excess pension savings. Both personal and employer provided pension savings will be taken into consideration in determining whether an excess arises.

Measures will be introduced to allow individuals to exceed the annual allowance with no tax charge accruing where there is unused capacity from the previous three years. For this purpose the annual allowance for years before 2011/12 will be deemed to be £50,000. To be able to benefit from this facility it will also be necessary for the individual to have been a member of a registered pension scheme at some time during those earlier years.

The Government plans other changes such as a proposal to reduce the lifetime allowance. This is set to reduce from the current £1.8 million to £1.5 million from April 2012. All of this may necessitate some careful planning for those seeking to make substantial pension provision now or in the future.

Please contact us for further guidance as to how this may impact on your individual circumstances.