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Aegon senior pensions development manager Kate Smith says adviser clients will need help navigating the tax-relievable contribution changes

The annual allowance for tax-relievable pension contributions is going to be reduced dramatically from April 6.

Currently, we get very generous tax reliefs for making pension contributions. Right now, we could get tax relief up to an annual allowance of £255,000 but this is coming to an end, with the maximum amount of annual contributions that will get tax relief coming down to £50,000.

The proposed changes will, on the whole, come into effect for tax year April 2011/12 and a summary of the key changes from April 6 are here:

  • A new annual allowance of £50,000 a year. This includes all individual and employer contributions
  • Carry forward of three previous years unused AA (to a limit of £50,000) into a suitable tax year. This is an unexpected bonus and will help smooth any spikes in potential tax charges
  • Tax relief will still be given at the highest marginal rate. This is easy for clients to understand and makes good tax planning for higher earners.
  • People in DB schemes will value the increase in their benefits using a factor of 16. The factor is currently 10. Members of DB schemes will be particularly impacted by these changes and will require individual advice.
  • And from April 2012 the lifetime allowance will reduce from £1.8m to £1.5m. Individuals with pension savings above £1.5m, who believe their savings will be higher than this level in the future, will be able to apply for a new fixed protection of £1.8m

These new proposals open up a wealth of advice opportunities for advisers.The new rules do not take effect on pension input periods (Pips) unless they are ending in tax year April 2011/12, in other words – after April 6.

Are your clients able to take advantage of this right now? There is still an opportunity to maximise on the current annual allowance of £255,000 for this tax year – and that includes employer and employee contributions.

Also, how many of your clients have utilised pension input periods over the past couple of years – and how many of them still have an opportunity to maximise their contributions for the Pip ending this tax year? Will they be affected by the transitional rules for Pips ending in tax year April 11/12?

How many of them have used a Pip ending in 2011/12 and need individual advice on how it impacts on their current pension accruals so as to avoid a nasty surprise from HM Revenue and Customs asking for a tax bill to be paid?

In addition, do you have clients that could take advantage of the new carryforward facility starting in April? This is an unexpected bonus and could mean that individuals would be able to roll-up three previous years of “unused” AA (to a limit of £50,000) into a suitable tax year and add them all together – mean-ing that some clients could do a maximum single gross contribution of £200,000 starting April 6, depending on their contribution history.

This opportunity might be suitable for those clients who have preferred to make larger irregular lump-sum single contributions. This may include those restricted by the anti-forestalling regulations and special annual allowance limits until April 2011/12 when those rules will be removed.

Don’t forget that all these proposed changes also affect DB pen’How many clients have used a Pip ending in 2011/12 and need individual advice on how it impacts on their current pension accruals so as to avoid a nasty a tax bill?

sion scheme members – and they will need advice on how best to supplement their annual DB pension accrual while they can in 2010/11 before the changes take place in the tax year April 2011/12.

Have you considered those clients who have been thinking about taking retirement benefits from their current arrangements? Those retiring (or taking pension benefits) may still be attracted to the final year flexibility rules where the AA does not apply – but only before April 6. This could be particularly interesting for those considering making employer contributions, are not caught by the anti-forestalling rules, do not have the personal earnings to validate a personal contribution and who want to make one last big single employer contribution and claim full tax relief.

And don’t forget clients whose pension savings are over £1.5m or who believe their savings could be greater than this amount. If they want to protect their pension saving from tax charges, they need to apply for the new fixed protection before April 6, 2012.

There is no doubt that many more employers, trustees and employees in both DB and DC will be affected by these changes starting in April – but there are also transitional rules affecting Pips ending in tax year April 2011/12 which take effect now.

There are great opportunities for advisers to make themselves indispensable in making maximum use of current tax reliefs and ensuring that clients are best advised on how the new pensions regime affects them now and in the future.

Employers, trustees and employees as well as individual clients will all need advice on how best to navigate these changes.


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