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New pensions tax regime unveiled

Although slightly behind schedule, the pension rules have now been confirmed aimed at meeting the Government's objective of restricting pensions tax relief through existing allowances.

The key decisions are:-

• From April 2011, the Annual Allowance (AA) will be £50,000 (reduced from £255,000).
• Where individuals exceed the AA in a given year, unused allowance from up to three previous years will be available to offset against the excess pensions savings.
• Unused allowance for the tax years 2008-09, 2009-10 and 2010-11 will be available against an assumed AA of £50,000.
• The tax charge for exceeding the AA will be a tailored charge aimed to recoup the full marginal rate tax relief that an individual has benefited from (replacing the existing flat rate tax charge).
• The current exemption from the AA test in the year benefits come into payment will be removed.
• Transitional rules for Pension Input Periods (PIPs) will be introduced, taking immediate effect. These will apply to those individuals whose PIP for 2011-12 has already started.
• The Lifetime Allowance (LTA) will be reduced to £1.5m (reduced from £1.8m). It is expected this change will take effect from April 2012.
• The Government intends to design a protection regime for those individuals who have already made pension saving decisions based on the current level of the LTA.

In addition, the valuation factor for calculating deemed contributions to a Defined Benefit scheme is to be increased.

After consideration, certain existing provisions will remain unchanged. Specifically, tax relief will continue to be available at an individual's marginal tax rate, and there will be no requirement to align Pension Input Periods with the tax year.

A summary of the responses to the Government's consultation document is available from HM Treasury website.

Posted 26/10/2010

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