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Freeze puts squeeze on pension limits

This pre-Budget report was all about temporary tax giveaways to entice people to spend our way out of recession. But there is no such thing as a free lunch, so it was always going to be the case that the Government would raise taxes for some.

The big shock is the Chancellor intends to freeze the pension lifetime allowance rate and annual allowance rate to help pay for the changes. These allowances were fundamental aspects of the increased A-Day flexibility.

The legislation set out the increases to both allowances up to 2010 and, although nothing was ever guaranteed, it was expected that they would continue to increase after that, at least in line with prices. Freezing these limits means more people chance paying the 55 per cent penal tax if their benefits at retirement are greater than £1.8m. Those close to the edge are best to revise their pension plans set in 2006 to take into account the lower levels.

Higher-earners will also bear much of the brunt of raised taxes from 2011, with the new 45 per cent tax rate and lower personal allowances, which will make pension contributions even more appealing. And it is proposed that both employers and employees will pay higher National Insurance contributions from 2011, making salary sacrifice a sensible business decision in the run-up to the introduction of pension reform and the new employer pension responsibilities.

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