Tax Year Pension Changes (March 2011)

Following a period of consultation regarding pension contributions and pension tax relief, the Coalition Government has now made decisions on a number of key points that will take effect from 6 April 2011. These are summarised as follows:

Annual Allowance

The annual allowance is the maximum amount of tax relieved pension savings that can be made in respect of a tax year to all pension arrangements for an individual. This may be contributions made by individuals, employer or by third-parties.

The annual allowance for the current 2010/11 tax year is £255,000.
A special annual allowance for high earning individuals, with annual taxable earnings in excess of £130,000, known as anti-forestalling regulations, will continue to apply for the 2010/11 tax year.
As expected, anti-forestalling will end on 5 April 2011 but the previous Government�s planned replacement, the High Income Excess Relief Charge (HIERC) will no longer be adopted.
The reduced annual allowance (AA) of £50,000 will apply from April 2011 and although this allowance may be subject to future indexation increases, this will not be until after 2015/16.
Full tax relief at an individual�s highest marginal rate (up to 50%) on pension contributions within the reduced Annual Allowance.
Valuing final salary defined benefits (DB) using an increased flat factor of 16 (the current factor is 10).
If contributions are made in excess of the Annual Allowance, a tax charge will be levied that effectively reclaims tax relief and reduces it to zero for the excess contributions. This replaces the current flat rate 40% tax charge.
There will be an exemption introduced from the test against the Annual Allowance for death or ill-health but not redundancy.
Pension Input Periods (PIP) will not be aligned to the tax year. There are transitional rules effective from 14 October 2010 for those who have already made, or will make, contributions greater than £50,000 in a PIP ending in 2011/12.

Re-introducing Carry Forward

The reduction in the annual allowance to £50,000 will undoubtedly cause issues for individuals who will find that they inadvertently breach this limit. Examples may include a promotional increase in salary for a member of a defined benefit occupational scheme or a one-off contribution due to a large bonus. The key points are:

From the 2011/12 tax year, the Government has introduced a three-year carry forward rule which may allow contributions larger than the annual allowance without incurring a tax charge.
Any unused annual allowance from the three previous tax years can be carried forward to the current tax year.
The carry-forward limit for 2008/09, 2009/10 and 2010/11 will be £50,000.
The current year�s annual allowance must be used up before any unused annual allowance can be carried forward from a previous year.
Unused annual allowance carried forward is taken from the �oldest� carry forward year first but if contributions in any one of the carry forward years is greater than £50,000, they may cancel out some or all of another year�s unused annual allowance.
The individual must have been a member of a registered pension scheme during the tax year they are carrying forward from and there must have been some pension �input� during the year.
Personal contributions that are fully tax relievable will still be limited to 100% of earnings in the tax year, although restrictions may apply to �high earners�.
Further clarification is required from the Government as to whether high earners, caught by anti-forestalling regulations can use carry forward in 2011/12 to obtain further tax relievable contributions for the two previous tax years in which they were restricted by the special annual allowance.

Lifetime Allowance

The overall limit that is applied to an individual�s pension funding from registered pension schemes that benefit from tax relief.

The lifetime allowance will be reduced from £1.8m to £1.5m from the 2012/13 tax year.
Anyone with existing primary or enhanced protection applying from A Day (6 April 2006) will continue to be unaffected by the reduction in the lifetime allowance.
A new type of protection known as Fixed Protection will be introduced for individuals who expect their benefits to be greater than the new lifetime allowance. This must be applied for via HMRC before 6 April 2012.
There may be some transitional protection for those with pension values already above the reduced allowance or who were planning their retirement benefits based on the existing lifetime allowance but further details are awaited.
The link between the lifetime allowance and the trivial pension limit will be severed as the limit will remain at £18,000.

The above is based upon Cartlidge Morland�s understanding and interpretation of HMRC practice as at January 2011. As such, we cannot guarantee that the above will apply as the legislation regarding pensions and the tax treatment of pensions may be changed at any time.

For a bespoke assessment of how the changes could affect you, please contact your Cartlidge Morland consultant.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

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