An 80 per cent cut in the annual pension savings limit would not normally be cause for celebration but these are not normal times.
The pensions annual allowance is to be cut to £50,000 from April next year but in reality these changes had already bitten for most of those affected. Anti-forestalling rules have frozen contributions for people with taxable income above £150,000 since April 22, 2009 and above £130,000 since December 9 last year. So most people with the means to pay in more than £50,000 are already limited to what they were paying in before anti-forestalling or £20,000. Therefore, for some, £50,000 is an increase over what they could pay this or last tax year. There is also a new rule allowing unused annual allowances to be carried forward from up to three previous tax years.
In applying this rule, the annual allowance for 2008/09 to 2010/11 is assumed to be £50,000. That means people whose contributions were restricted to £20,000 in this and the previous tax year because of anti-forestalling will have at least £60,000 of unused annual allowance come April 2011, in addition to their £50,000 annual allowance for 2011/12.
Relief is available at the individual’s highest marginal rate – that is, up to 50 per cent.
The reduction in the annual limit will affect defined-contribution savers less than defined benefit schemes members. Most in group personal pensions will see little effect.
The two DC areas that will feel most impact are bonus sacrifice exercises and big contributions to personal pensions, most likely Sipp. But even in these cases, the new limit will only affect a small number.
The new valuation multiplier for defined-benefit schemes is 16, a sizeable increase on the current 10. This will mean that high earners still lucky enough to be accruing final or average salary benefits are most likely to face the new tax charge. Large salary increases and augmented early retirement benefits will give rise to the biggest tax bills. This is a fair outcome as DB schemes currently claim two-thirds of all pension tax relief.
For those that do exceed the annual allowance, the tax charge will move from its current fixed 40 per cent level to a variable charge, reflecting the rate of tax relief received on contributions.
The annual allowance is higher than that set out in the July consultation document but the quid pro quo is a reduction in the lifetime allowance from £1.8m to £1.5m. However, it looks likely those with funds above £1.5m can to protect up to £300,000 of excess savings. Those who claimed enhanced or primary protection between 2006 and 2009 will also be protected.
John Lawson is head of pensions policy at Standard Life