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AS 2012: Osborne announces cuts to pension annual and lifetime allowance

George Osborne 480

Chancellor George Osborne has announced plans to cut the annual allowance for tax-incentivised pension saving from £50,000 to £40,000 and reduce the lifetime allowance from £1.5m to £1.25m in 2014/15.

The Government is also considering introducing a “personalised protection regime”, in addition to a new fixed protection, for people who think they will be affected by the lifetime allowance cut.

A J Bell says individuals will be able to apply for the new fixed protection from summer 2013 after the legislation has come into force.

For defined-contribution savers who apply for the new fixed protection, no further pension contributions will be allowed from 6 April 2014, while defined-benefit members will need to stop building up benefits from this date.

Investors will be able to apply for fixed protection if they do not already have one of the existing forms of protection.

The personalised protection regime, if introduced, would cover those with pension pots valued at more than £1.25m on 6 April 2014. A J Bell says this version of protection will allow people to continue paying contributions into their pension.

Giving his Autumn Statement today, Osborne said 99 per cent of savers make annual contributions of less than £40,000 and the average saver pays £6,000 into a pension each year.

He said: “We have in this Parliament already reduced the amount of tax relief we give to the very largest pension pots.

“From 2014/15, I will further reduce the lifetime allowance from £1.5m to £1.25m and reduce the annual allowance from £50,000 to £40,000.

“This will reduce the cost of tax relief to the public purse by an extra £1bn a year by 2016/17.”

It is the second time Osborne has cut the annual allowance since becoming chancellor in May 2010. In April 2011, the yearly cap on tax-free pension contributions was reduced from £255,000 to £50,000.

Last month, business leaders and pension experts warned reducing the cap further would hit public sector workers, who tend to receive large employer contributions in defined-benefit schemes, and entrepreneurs, who often make a few large contributions into their pension rather than regular, smaller payments.

There is also concern the decision to tinker with the tax system again, so soon after the last change, will put people off saving into a pension.

Osborne has also announced an increase in the maximum amount a person in capped drawdown can take from their pension each year from 100 per cent of the equivalent GAD annuity rate to 120 per cent.

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Didn’t see the LTA cut coming. £40k AA could have been worse. Increased Drawdown cap is welcome.

  2. It defeats my simple logic that the clowns in London want people to provide for their future yet continue to remove allowances…

  3. How can an IFA help clients plan with these political pigmies constantly moving the goalposts?

  4. Tinkering with this, messing with that ! Does any politician of any persuasion have any idea how to dig us out of the hole that they and their predecessors over the past 50 years have dug ?

    Don’t bother answering – any thinking person has stopped listening to the lies and obfuscation and already knows the answer.

  5. Well done George. Let’s encourage more high earners to avoid and evade tax to compensate for the retirement planning they can’t do now!

  6. One of the main hurdles to long term financial planning is that people fear legislation change.

    Pensions seem to bear the brunt of legislative whims and this does nothing to shore up any confidence which the public may still have in respect of pensions.

    I’m sure they may be more in the detail but they simply need to leave things alone for at least a year or so!!!!

    So much for ‘Pension Simplification’

  7. This means that, at current rates according to the Government’s MAS website, a 65 year old male with 60 year old wife could only have an index linked pension with 50% spouse’s benefit starting at £33,208 pa. An MP or senior civil servant with the same conditions could have a (largely) tax payer funded pension starting at £62,500 pa. Hardly seems fair to me!! I wonder how long it will take the public to wake up to this.

  8. Same old Tories.

    Handsome with the spin and short on truth.

    Drawdown increase welcome though.

  9. i don't think they know what they are doing 5th December 2012 at 6:56 pm

    this means anyone with 500k + who is 15 years away needs serious planning. The problem for an adviser is simply not knowing if the LTA is going to be indexed , and even then how can anyone believe any politician.

    it will hit civil servants on 75k+

  10. We are trying to encourage savings for retirement with auto enrolment, not discourage, and any negative publicity for pension changes is bad news. But lets keep in perspective, no changes to tax relief or tax free cash, be thankful for small mercies!

  11. Alasdair MacDougall 6th December 2012 at 11:02 am

    Unintended consequences? – take a teacher with 30 years service, who gets a promotion to deputy head/head teacher.

    Salary goes from £40,000 to £60,000.

    Pension goes from 30/80ths of £40,000 to 31/80ths of £60,000.

    Keeping it simple*, that means pension accrued increases from £15,000 to £23,250.

    Accural of £8,250 x16 = £132,000.

    Annual Allowance £40,000.

    £92,000 excess taxed at marginal rate of 40%.

    So, long-serving teacher will be presented with a tax bill for £36,800 simply for being a member of their pension.

    Genius.

    *ignoring inflation factor and tax free cash.

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