Pension Proposals

Most of our clients who make “tax advantaged pension savings” do so through some sort of personal pension scheme:

-          retirement annuity policies (RAPs),

-          personal pension policies (PPPs),

-          group personal pension policies (GPPPs), or

-          self-invested personal pensions (SIPPs).

The proposed new rules will affect them in two stages:

-          new cap on tax-relief set at £50,000 premiums from April 2011, and

-          reduced lifetime allowance from April 2012.

£50,000 limit

This will effectively cap the pension savings (on which tax relief is obtained at up to 50%) at £50,000. However, accepting that some people do not have level earnings or may, for example, sell a business and wish to make a large one-off investment in their pension plan, there is scope to increase the £50,000 by the amount by which tax-advantaged savings fell short of £50,000 in each of the preceding three years.

So, for example, if Aslam paid £30,000 in premiums in 2008/9, 2009/10 and 2010/11 he would have unused relief of £60,000 to carry forward to 2011/12. Subject to having the income to absorb the tax relief, he could therefore invest up to £110,000 in 2011/12 and obtain tax relief at up to 50%

One word of warning – the annual allowance is applied to the savings in the “pension input period” (PIP) ending in the tax year, rather than to savings 6 April to 5 April. You may need to check the dates with your pension administrator(s) but typically the first PIP began on the date you paid your first premium and ended one year after, so you may have different PIPs for different pension policies. Special rules apply for non-aligned PIPs in 2010/11.

Lifetime allowance

The lifetime allowance applies to total lifetime savings and in certain circumstances will result in a tax bill on the fund at retirement – typically when unprotected savings exceed the lifetime limit in value at that point.

Key dates

Special Annual Allowance – continues to apply until 5 April 2011

Blanket exemption from the Annual Allowance in the year benefits are taken – ends 5 April 2011

Reduced Annual Allowance – from 6 April 2011

Reduced Lifetime Allowance – from 6 April 2012

If you would like more information about how the current rules and the proposals apply to you, please speak with your usual Buzzacott contact or your pensions adviser.

Read the latest update on the pension proposal rules.