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Annual Allowance to be reduced?

Now that the Finance Bill has received Royal Assent, it would appear attention has now been turned to considering policy for the reforming of pension tax relief with the publication of a consultation document by HM Treasury.

Responses have been invited on the following key proposals:

• Reducing the Annual Allowance to somewhere between £30,000 and £45,000.
• Replacing the current flat rate Annual Allowance tax charge with a tailored rate which would operate in a similar way to the current Special Annual Allowance charge.
• Removing some of the exemptions from the Annual Allowance test, including the exemption for individuals in the year benefits come into payment and individuals claiming Enhanced Protection.
• Aligning pension input periods to the tax year.
• Capping tax relief at 40 per cent.

Given reducing the Annual Allowance could potentially affect more pension savers than before, it would appear the Government would look to scheme administrators to inform members should they exceed the Annual Allowance.

The consultation document also acknowledges the issues of valuing defined benefit contributions and whether the current level of the Lifetime Allowance is appropriate in the context of a reduced Annual Allowance.

The consultation period closes on 27 August 2010, with the Government's intention to confirm its intended approach by the end of September 2010. The full consultation document is available from HM Treasury website.

Posted 06/08/2010

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