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Annual allowance cut to £50,000

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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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. 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!

  2. 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

  3. So the Lifetime Allowance introduced in 2006 which, according to the rules, cannot be reduced, is now being cut. Ho Hum!!

  4. 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.

  5. 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

  6. 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.

  7. 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…

  8. 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.

  9. 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.

  10. 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.

  11. Julian Stevens,

    You were aware of the previous administration’s proposals to restrict higher rate tax relief ? You do realise this is the outcome of a consultation prompted by the industry and intended to achieve the same savings to the Treasury but in a fairer and more practical way ? You do know that the figure of £50k is higher than the expected figure of £40k ?

    Do you think your sense of perspective might be distorted even slightly by a personal dislike of Mark Hoban, when he’s had practically nothing to do with the substance of the consultation or its outcome anyway ?

    The increasingly ad hominem nature of informal comments on blogs, newspaper websites etc is corrosive. I don’t understand what is hoped to be achieved by it.

  12. Just be thankful I’m not the one in charge – I would have set the figure closer to £30,000

  13. What about the anti-forestalling measures in the meantime? Does this mean tax payers can now contribute £50,000 gross going forward and still receive 40% or even 50% tax relief?

  14. Potentially massive impact on DB Schemes.

    Take a long serving Doctor/Dentist/Head Techer earning £70,000 at start of year (just example earnings!)

    They have a bonus/pay rise taking earnings up to £80,000 the following year.

    Scheme is 60ths scheme, 20 years service at start of year, 21 years at start of the next.

    20/60ths of £70,000 = £23,333
    21/60ths of £80,000 = £28,000

    Increase = £4667

    Multiplied by new factor of 16

    = £74,672 deemed contribution

    = £24,672 above £50,000 annual allowance

    x 55%

    = £13,569 tax charge

    Finally, public sector workers will have to pay for their pension provision!

  15. Anti-forestalling measures remain in place until 6 April 2011.

    After that time, high earners can indeed contribute £50k gross pa (or even up to £200k if they use the full carry forward from previous tax years) and receive full tax relief at their marginal rate.

  16. Chris Harrington 14th October 2010 at 8:54 pm

    I think I must be missing something here. The majority of commentators seem to be disappointed with this news and I cannot understand why anyone would be anything but pleased.

    Firstly, the rule will allow all individuals to benefit from relief at their marginal rate. Therefore all those with income in excess of the £130k limit will now be able to make pension contributions and benefit fully from the relief as opposed to having this relief tapered away. This is a massive step in the right direction.

    Secondly, the only people that this is a step back for are those individuals with income below the £130k threshold who were wanting to make contributions in excess of £50k per annum. How many people actually fit into this category? To my mind, those client’s wanting to make contributions above that amount each year are generally earning significant levels of income and were caught by the £130k rule anyway….or do you all have lots of client with income under that level and who want to make contributions in excess of £50k per annum?

    In addition, the facility to carry forward unused allowance will give people the potential opportunity to make larger contributions if a one off situation arises e.g. a settlement etc.

    Finally, the rules are simple and clear which is another massive step forwards and does have a genuine whiff of pensions simplification.

    I, for one, think this is a positive move and will be positioning it as so with all of my clients.

  17. The new proposals in regard to contribution limits are indeed welcome and should really have been applied with immediate effect.. as I suspect there would have been very little in the way of complaints. On the other hand however the real losers will be those affected by the reduction of the lifetime allowance.. These people had sought transitional protection at A-Day and had been managing their funds in line with increases in the lifetime allowance, now the same people are being told that the lifetime allowance will go back to £1.5m and must surely mean, regardless of the protection factor these people may have been granted at or post A-Day, that they will now face a lifetime allowance excess charge? Surely there must be provisions for these in the legislation? If not then there may be some solace for those affected by the proposals to allow un-used funds to pass to heirs without IHT charges… but only if these are enacted too? Anyone heard anything that may ease my worries?

  18. A step in the right direction. What a pity the government is reluctant to do the full job and remove tax relief on input completely and apply it to output. They could then afford a pension credit to the poorer end of society that would have some meaning.
    ID-S has had some thoghts along these lines but not the balls to go the whole hog. He should.

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