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.”