Pension contributions - certainty at last?

Forgive us, as you may feel that you have heard this all before, but we felt that a pre year end summary of the rules governing pension contributions would be helpful.

Typically we advise that you contribute now to receive tax relief early, but it may be that a delay to 2011/12 could give you a better answer because greater relief may be available in the future.

By way of background, Budget 2009 heralded the removal from high earners (those earning over £130,000) of much of the tax relief that pension contributions had enjoyed in previous years. The rules for 2009/10 were complex and full tax relief for the current year is generally restricted to either £20,000 or £30,000 for most self employed individuals (you may have greater relief available if you made regular contributions before certain dates in 2009).

Recently published draft legislation is intended to create a more straightforward and, it is hoped, longer lasting system for 2011/12 and subsequent years. In essence all taxpayers will be entitled to full tax relief for pension contributions of up to £50,000 per tax year, with a possible carry forward of unused relief for three years; hence the possibility that a delayed contribution may be beneficial.

One technical point, the amount of contributions possible is determined by the tax year in which your pension input period (PIP) ends, which may be 2011/12 not 2010/11. This should be reviewed before significant contributions are made.

Inevitably, there is a downside - the lifetime limit for your pension fund which is £1.8m is to be reduced to £1.5m from 6 April 2012 - protection may be available, so please review your circumstances with us or your financial adviser if your fund is approaching or between these levels.

Finally, if you have drawn any pension benefits it is vital that your position is reviewed by your financial adviser before 5 April.

As with last year, it is imperative that you take advice from us or your financial adviser to ensure that you are able to make the best use of the available tax relief and do not fall foul of the detailed rules.