All advisers should be aware of the anti-forestalling legislation that covers the restructuring of pension contributions into separate pension schemes and currently applies to those with relevant income of more than £130,000.
This legislation, introduced on April 22, 2009, and subsequently adapted on December 9, 2009, for those with relevant income in excess of £130,000, can be complex and advisers should ensure they advise accordingly so that clients do not get caught out by paying too much tax.
These rules are most likely to affect anyone with higher earnings whose pension contributions exceed the special annual allowance of £20,000 as outlined in the anti-forestalling rules.
These pension contributions above the special annual allowance have been protected from tax charges if contributions were paid regularly or were within the infrequent money purchase contribution threshold cap of £30,000.
However, recent regulations covering transitional protection of these inputs from April 22, 2009, may end the protection for people saving into new schemes, while it remains intact for those who continue to save into an already established scheme. From April 2011, protection will end altogether.
Advisers should tread carefully to ensure clients continue to receive appropriate tax relief in the run-up to the 2011/12 tax year and that they do not inadvertently end up without the protection they thought they had.
These changes may affect those who have a protected pension input above £20,000 with no infrequent moneypurchase threshold to fall back on who:
- Are looking to, or have already altered their contributions, since these rules came into force (except if the client has a percentage-related contribution rate that was agreed before the anti-forestalling rules came into place)
- Have recently changed employment where a new employer has a new scheme offering available to the client
- Have an employer that is restructuring existing pension arrangements
- Wish to restructure their own private pension provision into an alternative scheme.
If the client has been making protected contributions into a personal pension, any restructuring of existing pension contributions to a new scheme requires careful consideration. Advisers and clients should note that consolidation of existing protected contributions from multiple existing arrangements into one new arrangement will result in the loss of any protected pension contributions.
In order to set up a new arrangement and maintain a level of contributions above £20,000, the contributions to the new arrangement have to start within three months of the client ceasing to be a member of the old arrangement. Future contributions must be made at least quarterly and continue throughout the current tax year. The client can miss up to two contributions without affecting the continued protection.
Problems are less likely to arise if a current employer reorganises its existing pension provision, perhaps moving from a group moneypurchase occupational scheme to a group personal pension scheme. Scheme members will continue to enjoy protected contributions if the arrangement under the new scheme is set up within three months of funding ceasing to the old arrangement.
The limit on the protected pension contribution will be the same if the funding had continued to the old arrangement.
These complexities will disappear from the 2011/12 tax year when the special annual allowance and protected pension inputs are removed. For some, the decision may be to continue using existing arrangements for this tax year, to preserve the higher levels of fully relievable funding and to delay any plans for consolidation.
Alternatively, some schemes may offer a partial transfer, allowing funding to continue in the existing protected contribution arrangement to the end of this tax year with most of the existing fund held in the new scheme of choice.
It is essential for advisers with clients affected by the anti-forestalling rules to understand the complexities of these transitional rules. Wrong decisions taken now may lose clients valuable protected inputs, which could result in the client paying a tax charge on their funding above the special annual allowance of 20-30 per cent.
Advisers should carefully review clients’ policies and protection before they make any changes.