Coalition plans annual allowance
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The Government is proposing an annual allowance for pension contributions of £40,000 and suggests this could be indexed in the long term.
In a consultation document on the restriction of pensions tax relief, published this week, the coalition proposes slashing the lifetime allowance from £1.8m to £1.5m, which it says would raise £100m to £200m by 2014-15 but more over time.
It says cuts to the lifetime allowance may be able to fund the indexation of the annual allowance over the longer term.
The Government has ruled out introducing an age-related factor to calculate accruals to defined-benefit schemes, which was favoured by the previous administration. It plans to inc-rease the current flat rate factor used from 10 to between 15 and 20 and says this would mean an annual allowance of £40,000 should be sufficient to deliver the same yield as Labour’s restriction to tax relief for high earners.
The consultation is looking at capping tax relief at 40 per cent on savings below the annual allowance, even for additional 50 per cent taxpayers, to bring in an extra £500m a year revenue.
The Government says it may allow one-off spikes in contributions although cases of ill-health, early retirement or red-undancy will not be exempt from the annual allowance.
It is also considering freezing the value of rights covered by primary and enhanced protection, saying this would “fit better with current policy”.
Informed Choice chief executive Nick Bamford says: “This still does not go anywhere near dealing with the problems we have in saving for retirement.”
Fidelity International director of tax and trust planning Paul Kennedy says: “Plans to cap tax relief at 40 per cent would make things twice as complicated as even Labour’s regime.”
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