All Change Again on the Pension Front

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In mid October 2010, the government introduced draft legislation covering major changes to rules regarding pension contributions which will take effect from 6 April 2011. Whilst some of these changes are to be welcomed, others are not, but the overall feeling in the pensions industry is that the proposed rules represent a considerable simplification of the current over complicated rules. The changes affect both Defined Contribution (DC) and Defined Benefit (DB) schemes. As the majority of such schemes are DC schemes, this summary focuses on the changes affecting such schemes.

The main changes proposed are:

  • A reduction in the Annual Allowance (AA) from £255,000 to £50,000 
  • Tax relief will be available at the members highest marginal rate 
  • Unused AAs may be carried forward by up to 3 years (but see below) 
  • The Lifetime Allowance will be reduced from £1.8m to £1.5m from 6 April 2012. Enhanced and/or Primary Protection rights will be retained 
  • The anti forestalling rules that applied from 22 April 2009 will continue until 5 April 2011

Whilst these new rules are subject to the draft legislation being passed in parliament they are not expected to change significantly. Further clarification will follow as the draft bill progresses.

There are a number of opportunities that arise from the proposed new rules and these should be considered well before 5 April 2011.

Reduction in Annual Allowance

The new limit will include both contributions made by the individual and their employer. No tax relief will be available on the excess contributions over the £50,000 limit. This will mean that any excess relief obtained by the member will need to be repaid and if it results from the employer contribution, tax on the excess will need to be paid by the member at their marginal rate of tax.

Tax relief for employee contributions is still restricted to premiums representing up to 100% of the earnings (or £3,600 if more). Business tax relief for employer contributions is still dependent on them being wholly and exclusively for business purposes.

From April 2011, contributions in excess of the AA will be subject to the Annual Allowance charge at the marginal rate of tax of the member (rather than a flat rate 40% which currently applies).

There is also a complication regarding Pension Input Periods (PIP). Since 6 April 2006, the AA has been tested against contributions in a PIP that ends in that tax year. Typically, a PIP started from the date of the first contribution to a scheme although other schemes may be linked to the employer’s year end or the birthday of the member.

It is possible that contributions to a scheme with a PIP that ends after 6 April 2011 may have already exceeded the proposed new AA. Where the PIP that ends after 6 April 2011 commenced before 14 October 2010, the old AA of £255k will apply for 2011/12, subject, of course, to the anti forestalling provisions. Any PIP that started after 14 October will be subject to the new reduced AA of £50k for 2011/12.

Carry forward of “Unused Annual Allowance”

Individuals will be able to carry forward unused AA from the three previous tax years to set against contributions in excess of the AA for a particular year. The AA for the current year must be used first and then the AA from previous years may be used, starting with the earliest.

The AA for tax years prior to 2011/12 is deemed to be £50,000 for this purpose and consequently, there may be scope for those caught by the anti forestalling provisions limiting their contributions for 2009/10 and 2010/11 to either £20,000 or £30,000 to make a catch up payment after 5 April 2011 and get tax relief at up to 50%.

At this stage, there is some uncertainty as to the exact meaning of “Unused Annual Allowance”. The draft legislation appears to say that an individual has to be a member of a registered pension scheme during the period to be able to carry forward the unused AA. However, HMRC guidance refers to a contribution having to be made to the scheme to be able to carry forward unused AA. Further guidance is expected to clarify this matter but it does not appear quite as generous as it first reads.

Employer Funded Retirement Benefit Schemes

These have been used by individuals to avoid the Special Annual Allowance Charge that was introduced on 22 April 2009. It is expected that legislation will be introduced in the next Finance Act to ensure that EFRBS are less attractive than other forms of remuneration so these appear to have a limited lifespan.

Summary

These changes affect high earning and high contributing individuals and detailed consideration of existing pension arrangements is recommended. There may be a window of opportunity in 2011/12 to maximise available reliefs at 50% and this needs to be considered sooner rather than later. If you are interested in finding out more, please email or ring your usual Throgmorton contact. 


Rob Menhenitt
2 November 2010


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The information in this notice is intended for general guidance only. Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances.