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Govt proposes £40k annual allowance

The Government is proposing to implement an annual allowance for pension contributions of £40,000 and suggests this could be indexed.

In a consultation document on the restriction of pensions tax relief, published today, the Government rules out introducing an age related factor to calculate accruals to defined benefit pension schemes, as favoured by the previous administration.

It is keen, however, to increase 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 the plans to restrict tax relief for high earners.

The coalition also suggests slashing the lifetime allowance from £1.8m to £1.5m adding that this should raise between £100m and £200m by 2014-15, increasing over time. It says this change would create the possibility of indexing the annual allowance over the longer term.

The consultation also proposes capping tax relief at 40 per cent on savings below the annual allowance, even for additional 50 per cent taxpayers. The Treasury calculates that this would bring in an extra £500m a year in revenue.

While the Government is keen to exempt people who die or are diagnosed with a terminal illness from the annual allowance test it believes it would be inappropriate to exempt cases of ill-health, early retirement or redundancy. Although it says it may allow one-off spikes in contributions.

The Government is also considering freezing the value of rights covered by primary and enhanced protection.

It says: “This could mean that any increase in value after that date would be subject to the lifetime allowance charge when benefits are crystallised. This would remove much of the complications associated with existing enhanced and primary protection rules and fit better with current policy.”


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

  1. pensions manager 27th July 2010 at 12:37 pm

    Whatever happened to simplification?

  2. This doesn’t look much like simplification to me. Why is the government so hung up about keeping the LTA (yet another Labour spanner in the works)? It affects only a relative handful of people but makes the paperwork for vesting pension funds immensely more complicated and intimidating for everyone. The result? More ordinary, middle to moderate earners people are discouraged from committing money to a pension plan. Stupid. About the only thing with which I agree is limiting tax relief to 40%.

  3. What really bugs me is how Labour managed to contrive what is possibly the worst piece of pensions legislation ie the special annual allowance, when the solution was far simpler.

    Common sense politics from the coalition.

  4. Simplification…? Good while it lasted..

    ……….and possibly more retrospective regulation… naughty…

    again….. all this ‘extra income’ to the Treasury will no doubt be negated by the costs involved in its implementation

    GO…. If you need the money… stick another 2p on cigarettes.. 🙁 .. simples…

  5. I remember being castigated by my “compliance persons” for adding the caveat that “future governments can and will change the rules, regulations and tax legislation which may retrospectively render this advice unsuitable” to my RW letters and reports.

    RW letters ended up looking like Reason Why NOT letters.

    Why do politicians fiddle about wiv de settings for a few weeks and then go on a world tour which lasts a bit longer? The country blunders on as usual which makes you wonder if we really need all the civil servants and politicians.

  6. I have worked in financial services for 16 years and have seen many many changes to pension laws over that time.

    It is no wonder why the general public have no trust in the pension scheme when every 3 or 4 years it is all chance.

    All I ask the government is come up with a simple system and then leave it alone. PLEASE.

  7. And what about the self employed who may go several years without any significant earnings and then want to put in one large contribution to make up for previous lost years?

  8. as 80% of personal pension funds in the UK are less than £30,000 why on earth are we taking exams that seem solely based on the upper limits.

  9. Typical politicians unable to introduce radical and effective reform. Here is a list of things for them to do to “simplify” the whole pensions mess that successive Governments have got us into;

    Introduce a £10,000 per year Basic State Pension linked to CPI available to all with a 30 year NI record and scaled down for those with less from age 66. Get rid of S2P benefits.

    Pay for it by abolishing all tax relief on pension contributions.

    Abolish RPI linking of public sector pension benefits.

    Get rid of the stupid SLA rules and all the pensions legislation nonsense that goes with it.

    Do away with any means tested post retirement social security benefits.

    Abolish contracting out and the silly rebates asociated with it.

    Allow access to pension funds at any time with a tax charge for monies taken out. Do away with tax free cash.

    Any one who feels they need more than £10,000 per year or who wants to retire before SPA can save and invest to do that.

    Do something called simplification that actually does simplify it.

  10. Now come on guys, we all know what the public would like, but then the FSA will have nothing to investigate and blame us for!!!! it keeps jobs for the boys at the public and our expense

  11. So Nick, no tax relief on contributions, and all monies taxed on the way out… Yep that will get the nation saving.

  12. Angela

    As opposed to tax relief on the way in and…. oh yes the nation is still not saving!! Don’t focus just on the tax relief read all that I wrote

    My way is “simple” and will work the current way doesn’t work

    Trust me I’m an IFA

  13. Richard Jacobs 27th July 2010 at 6:25 pm

    Ok I agree with most comments but lets stop moaning about things and do what is asked they want to consult so consult and give some constructive views about complication, costs, future protecting, unforseen consequences, and above all the need for consumers to have stability in rules so confidence can return.

  14. Julian Stevens 27th July 2010 at 6:29 pm

    Sorry Nick, but you’re talking out of your fundament. Scrapping all tax relief on pension contributions would be tantamount to the government scrapping private pensions altogether. Who’d bother with one?

    The biggest turn-off with pensions is the annuity trap at retirement. Merely removing the requirement to lock into a lifetime annuity but without removing the shackle of GAD Rates to all the alternatives is just messing about with a broken machine without actually fixing it. And that 55% tax charge on unspent funds arising on death after retirement ~ hated now and it always will be. Why keep it?

    As for the poster who pointed out that most pension funds are less than £30K ~ yes, that’s utterly dismal. This government SAID that it intended to reignite the UK’s saving (for retirement) culture.

    But now that seems to have been just a load of aspirational yet empty pre-election bluster. The latest changes announced by Mark Hoban are not, IMHO, going to encourage anyone either to start putting monery into a PP or increasing contributions to the one they already have.

  15. Terry Mullender 27th July 2010 at 7:55 pm

    In my considerable experience,most people can’t see beyond their next pay day let alone commit to saving for thirty plus years.

    A £40,000 annual allowance seems a much simpler way of restricting overall tax relief. This is sufficient for 95% of the UK population I would say.

    The solution really is very simple.

    Every person (with no exceptions) who is employed has to pay a percentage of their salary into a private pension plan for all of their working life. Occupational or personal it doesn’t really matter.

    NO opt outs.

    Over time this will dispense with State means tested benefits, and will eliminate the rediculous situation we have now whereby for many it really does not pay to save.

    Give people opt outs and the majority will not save. Simple.

    How many people given the choice, would pay tax or NI?

    You can’t miss what you never had.

    Oh, and I disagree with Julian. There is nothing wrong with providing someone with a guaranteed income for life, i.e. an annuity in exchange for a capital sum.

    In my opinion, most people,given the opportunity, would plunder their savings & end up destitute in retirement. Sad but true.

  16. I agree the many of the comments and certainly feel sorry for those who are self employed and will undoubtably have years of low earnings. Why not go full circle and go back to pre A-Day. That is you cant contribute above a certain percentage of earnings and you can mop up unused relief from previous tax years (remember carry back and forward ladies and gentlemant). As for the level of tax relief why not scrap higher rate tax relief that way those who we want to encourage to save (lower earners) will still be encouraged to do so.

  17. What a disaster. Let’s abolish defined benefit schemes in the public sector – starting with the MPs scheme first.

  18. oh i wish people could do numbers. A 10yr gteed annuity at age 75 just about returns all the capital on death through payments or desth benefit, so the “annuity trap” is in most advisers and clients minds but is not real when you look at the numbers. it is self-serving for IFAs to want to continue to run a client’s pot of money though.

  19. At various conference presentations from 2006 onwards I stated clearly that the generous annual allowance could not last for long.

    But these proposals I did not expect. What is really cynical is the short consultation period – only until 27 August.

    Those who registered for enhanced protection are now in effect threatened with having a lifetime allowance exemption renaged upon.

    All the same there are some really big advisory pluses – QNUPS for example.

    And for those with large funds (in particular with enhanced protection) one way of achieving protection from a future lifetime allowance charge is to consider a transfer to a QROPS – even for UK residents.

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