The 2009 Budget ushered in new legislation drastically shrinking the tax advantages of pension contributions for high earners. From April 2011, what was 40 per cent tax relief on high earners’ pension contributions will be halved to the basic rate of 20 per cent. In between now and then, the options have been severely limited.
Pensions: The New Rules Explained
Position before 6 April 2009
For 2009/10, the amount an individual can contribute to their pension is limited by HMRC in respect of:·
- the annual allowance, which limited the amount that could be invested in any one tax year, currently £245,000
- the lifetime allowance, which limited the overall amount that could be invested, currently £1,750,000 (figures for tax year 2009/10)
Tax relief was available on contributions to a maximum of 100 per cent of relevant income, subject to the annual allowance. Amounts in excess of the annual allowance were subject to tax at 40 per cent.
Position after April 2011
For individuals earning more than £150,000 in a tax year, the amount of pension relief will reduce from 40 per cent to 20 per cent on a tapering scale for incomes between £150,000 and £180,000 with those earning more than £180,000 limited to 20 per cent relief, the same as a basic rate tax payer. Details of the tapering relief system are yet to be announced.
Transitional period – 6 April 2009 – 5 April 2010
Anti-forestalling measures prevent people potentially affected by the changes from making artificially large contributions. These measures include a special annual allowance test that limits tax breaks on pension funding for high income individuals with relevant income of the £150,000 a year or more. It runs in tandem with the usual pension annual allowance and will last until 5 April 2011 when final rules will be put in place.From 22 April 2009 to 5 April 2010 and for the 2010/11 tax year, the special annual allowance for high income individuals is the highest of:·
- a basic allowance of £20,000·
- an enhanced allowance of up to £30,000 (applies to contributions made less frequently than quarterly) and is based on the lower of (a) the average of these contributions in the three tax years 2006/07, 2007/08 and 2008/09 and (b) £30,000·
- their protected pension input amount (based on their normal amount of regular pension contributions before 22 April 2009).
This special annual allowance applies to all pension provision for affected individuals, whether made personally or by an employer or third party.
……………………….Given the state of the country’s finances, few are betting on a change of heart should the Conservatives win the election. As such, the effects are likely to be far reaching, with many advisers encouraging high earners to review their situation and seek out alternatives for their retirement provision. ………….
Colin MacPherson, pensions technical manager at Alan Steel Asset Management, says: “The pension simplification rules that came in on A-day (6 April 2006) had a negative impact for some high income individuals who had to adjust to new rules and change their retirement plans accordingly. Now these new rules have even further negative impact and are, in effect a major blow for the future retirement plans for many high income individuals.”
MacPherson notes that HMRC has also redefined “relevant income” and that it now takes income from other sources into account for pension planning. For example, it now includes unearned income, trust income and bond encashments. “This is a whole new area for individuals to consider and assess whether they are affected,” he warns.
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Quote courtesy of CA Magazine January 2010
