The Coalition Government has set out the new pension tax relief rules which will apply from 6th April 2011. One of the principal changes, which had been widely expected, is the reduction in the Annual Allowance from £255,000 to £50,000. The new £50,000 limit will apply until 2014/15 after which time the Government will “consider” indexing the allowance.
An important window of opportunity exists for those wishing to fund pension contributions in excess of £50,000 before the end of the tax year, however, complex transitional rules will still apply to those earning over £130,000. The exemption from the annual allowance that currently applies in the year benefits are crystallised will be removed. Interestingly the ability to “carry forward” unused annual allowances has been reborn with the ability to fund unused allowance in the three immediately preceding tax years. Although this again offers opportunity for some, it finally puts an end to any idea of pension simplification! Carry forward will be available in respect of tax years 2008/09 through to 2010/11 but will be limited to the £50,000 annual allowance for each of those years. For those lucky enough to be members of a final salary (defined benefit) scheme the benefits will be revalued using a 16 times salary multiple after allowing for salary inflation in line with CPI.
Previously the multiple was just 10. This should cause little concern for most, however, care will need to be taken for anyone receiving a significant pay increase. We have added a worked example on our website for those of you who wish to view it. The responsibility for notifying the HMRC where pension savings exceed the annual allowance falls on the individual through the self-assessment tax return, although they can request the administrator for their pension scheme to provide a “pension savings statement” of the amount of contributions made during the current and preceding three tax years. It is proposed that the annual allowance charge would be payable by the member either at the time it arises or at the point of benefit crystallisation.
The Lifetime Allowance (the maximum pension fund that each individual can accumulate without incurring penalty) is to reduce from £1.8 million to £1.5 million with effect from April 2012 with no indication of future indexation. The Government has, however, indicated that they will not apply retrospective charges to individuals who already have enhanced or primary protection on their pension funds. They are in discussion with the pensions industry as to proposals for those individuals whose pension funds are currently valued between £1.5 million and £1.8 million and for those whose pension funds are expected to increase above £1.5 million over time through investment growth. Further detail is expected to be released by the end of 2010.
Careful planning needs to be effected to ensure the current rules and new proposals are maximised without incurring unnecessary overpayment charges. For those earning in excess of £130,000 there may well be the option to make more sizeable contributions from April 2011 using up unused allowances from previous tax years. Conversely, for those earning less than this there is an opportunity before the end of the tax year to take advantage of the current Annual Allowance, subject of course to earnings. Pension planning may also enable the personal allowance to be recovered for those earning over £100,000 (it is currently tapered away by £1 for every £2 in income over £100,000).
In this ever changing and complex arena our team of advisers would of course be happy to discuss your retirement options in further detail.