Annual allowance cut to £50,000
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The Treasury is to cut the annual allowance for pension saving from £255,000 to £50,000 from next April.
The change will affect 100,000 pension savers, 80 per cent of which have incomes above £100,000, according to the Treasury. Pension savings above this level will be subject to a 55 per cent tax charge. Individuals paying 50 per cent tax will be able to claim relief at the full marginal rate.
Individuals will be able to offset unused parts of the allowance over a three year period to allow for one-off spikes in contributions over the £50,000 limit.
The lifetime allowance will be cut from £1.8m to £1.5m in April 2012. The Treasury will consult later this year about measures to help those who are close to and may breach the new limit.
For defined benefit schemes, increases in benefits will be valued at a factor of 16 compared to the current factor of 10. The increase is less than many had expected.
Treasury Financial Secretary Mark Hoban says: “We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.
“The coalition Government believes that our system is fair, will preserve incentives to save and - compared to the last Government’s approach - will help UK businesses to attract and retain talent.”
The new structure was put to consultation in July following widespread criticism of the previous administration’s proposal, the High Income Tax Relief Charge, which involved an earnings test, an age-related method of valuing final salary and other defined benefit pensions, and a complex tapering of tax relief for earnings between £150,000 and £180,000.
At the time, the Treasury said Labour’s approach could have “unwelcome consequences” for pension savings, bringing significant complexity to the system and damaging UK business and competitiveness.
However, Chancellor George Osborne insisted the alternative would have to provide at least as much revenue (£3.5bn) as the previous proposals.
If the amended approach is adopted, the restriction of pensions tax relief would take effect from April 6, 2011 and be legislated for in the Finance Bill next year.
Standard Life senior pensions policy manager Andrew Tully says: “’I welcome the Government’s move to replace the exceptionally complex changes which were due to be introduced from next year. An annual allowance works in the same way as Isa limits so is simple, clear and easy for people to understand. The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want.”
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Readers' comments (19)
PensionMan | 14 Oct 2010 10:12 am
Sounds simple enough and has to be better than the farce that the last lot came up with but, as ever, the devil will be in the detail!
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Anonymous | 14 Oct 2010 10:26 am
A dangerous precedent has now been set.
A change that actually simplifies things, is easy to understand and enforce and actually makes sense.
Woe betide us
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Cooper34 | 14 Oct 2010 10:29 am
So the Lifetime Allowance introduced in 2006 which, according to the rules, cannot be reduced, is now being cut. Ho Hum!!
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Anonymous | 14 Oct 2010 10:31 am
Yes, easy to think it only affects the 'fat cats' but this measure could severely impact any normal, middle level earner who leaves on redundancy terms with a pension enhancement as compensation.
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Marty Young | 14 Oct 2010 10:53 am
To Annon at 10.31. I dont know of any "normal or middle" earners whose redundancy terms that include pension enhancement being at a level of pay + £50001 or more pension enhancement. That would seem to be out of the norm to us normal people with normal or middle earners. Even if there is the odd one or two they could negociate a mix of the two to their own advantage. It is clearly aimed at those who can afford it this time. Thank God for some common sense in Parliment at last
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Norm d'Plume | 14 Oct 2010 11:00 am
This sends out the wrong message to the ordinary saver:
1 it draws attention again to the high earners - there is a great interest amongst many people in the politics of envy
2 this is unfair treatment of most of us when top civil servants, judges and the like don't have the same - so don't talk to me about fairness
3 the message it sends out to everyone can be, "Don't save for your pension, because we intend to keep tinkering with the rules"
4 this is not going to save billions and it is going to stop money which would have been invested for the future in being so invested.
All in all I regard the announcement as further evidence of a lack of understanding of pensions and a pandering to the politics of envy.
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Anonymous | 14 Oct 2010 11:06 am
Even if a 'middle earner' did have a very generous settlement package the statement says any unused allowance can be effectively carried forward for 3 years - it would be an extremely generous employer that would add in excess of £150,000 to pensions or £9375 increase in benefits on a DB scheme...
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Markco | 14 Oct 2010 11:07 am
Yes, common sense at last. Some pain, but given the current economic climate, inevitable. Some will take the opportunity to let off steam, because that's in their nature, not because this announcement affects them.
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Anon E Mouse | 14 Oct 2010 11:50 am
I think we will all need to wait and see the 'small print' and hard copy calculations before anyone can start to panic. What the Govt do not seem to realise is that 'high earners' have the means to simply cease placing funds into pension and re-direct savings into other areas that will give them tax breaks. I am thinking of simple stuff here like ISA and VCT. ISA gives virtually tax free fund growth and tax free income, VCT gives tax breaks on way in and tax free dividends. Throw into that a joint taxable DFM portfolio, with annual income taken via 2 x CGT allowances and an offshore Bond that gives 5% tax deferred capital returns and hey presto, the higher earner has a large majority of their retirement income tax free. This Govt may have some great ideas in their armoury, but they must be very careful that they do not cause the 'average' man in the street loss of disposable income in their quest to seemingly hit the affluent.
The vast bulk of the population do not have enough disposable free income to fund pension plans to the extent required to provide a truly comfortable retirement. They focus on paying their mortgages, rents, bills and feeding their families.
We are coming up to Xmas and if people are afraid to spend, due to concerns about rising costs, job losses and future retirement provision, there will be no extra money pumped into the economy. Which will adversely impact the retail sector early next year. Its a vicious circle.
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Julian Stevens | 14 Oct 2010 12:41 pm
I'd be interested to know by what logic Hoban has arrived at the opinion that announcing an 80% cut to the current maximum input allowance, not to mention lowering the LTA, are going to do anything to encourage more people to save more for their retirement.
Whilst these cuts won't affect most people, they're just more NEGATIVE news about pensions and will only add to the general peception that this government is no better disposed towards pensions than the last bunch of prats.
And what's being given in return? Repealing the tax on dividend income? Nope. Reintroducing WoP or life cover? Nope. Freeing pension funds from the annuity trap and GAD Rates? Nope.
A pox on you Hoban ~ in your almighty ignorance of what the public really think and feel about retirement saving, you're just as bad as the last lot.
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