Changes to Pensions Allowances

Date: 10 January 2011

Pensions Tax Relief

The Government recently implemented some new rules to restrict pension tax relief. Here is a brief outline of the changes.

The current contribution allowance for pension contributions is the lower of earnings (Net profit) or £255,000. This however changes in 2011/2012 when the maximum per person per year will be capped at £50,000.

Tax relief will continue to be at the individual’s marginal rate. This means that high earning individuals will be able to receive up to 50% tax relief on their contributions.

From 6 April 2011 there will be the ability to carry forward unused contributions from the previous three years (i.e. back to 2008/2009 for 2011/12), potentially enabling contributions of up to £200,000 in a particular year.

HMRC have confirmed that an individual does not need to have made a contribution to a pension scheme in a year to be able to carry forward unused allowances – they simply need to have been a member of a scheme.

For example if they paid £20 to a Stakeholder in 2001 and have paid nothing to any schemes since, they will have £50k unused allowances to carry forward from each of 2010/11, 2009/10 and 2008/09 which would enable a contribution of £200k (assuming they had enough relevant UK earnings) on 6 April 2011. This contribution does not need to be made to an existing scheme.

The Lifetime Allowance will be reduced to £1.5m from 6 April 2012.

There will be protection for those clients who have already made contributions and whose funds are likely to be between £1.5m and £1.8m. This will be known as ‘fixed protection’ and individuals will have up until 5 April 2012 to register with the HMRC. The forms to register for protection are yet to be issued.

To keep this protection certain conditions need to be met. These include:

- No new contributions can be paid to any money purchase arrangement after 5 April 2012.

- The amount of benefits that can be built up each year under a defined benefits arrangement or cash balance arrangement will be limited.

- No new pension arrangements can be set up unless it is to receive a transfer from an existing arrangement.

Individuals who already have enhanced or primary protection are not affected by the reduction in the Lifetime Allowance.

There will be a flat rate factor of 16 times for calculating deemed contributions to Defined Benefit (DB) schemes.

From 6 April 2012 the triviality limit will be de-linked from the Lifetime Allowance and it will remain at its current level of £18,000.

Where a scheme allowed a tax-free cash sum of more than 25% at 5 April 2006, it can be revalued using the ‘underpinned lifetime allowance’ of £1.8 million (i.e. tax fee cash will not be affect by the reduction of the Lifetime Allowance).

This is a broad overview of the pension changes. For more detailed or specific information on pensions, savings or investment matters please contact Alex Caulder, a partner at St. James’s Place Partnership on 07952 409006.