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UK Pension tax allowance: how the changes affect you
The Government has cut the amount we can save tax-free. Our Q&A explains the impact.
By Rosie Murray-West
Published: 9:51AM BST 15 Oct 2010
Government proposes to cut the amount someone could save over their life while still receiving tax relief to £1.5m from £1.8mPhoto: Steve Caplin
The announcement on pension tax relief was welcomed by many who had feared that relatively modest pension pots could be hit by the changes. Treasury estimates suggest that 100,000 people will be affected, far fewer than the half a million originally feared. Read on for what has been suggested and how it might affect you.
WHY IS THE GOVERNMENT CHANGING PENSIONS AGAIN?
The cost of giving people tax relief on their pensions has doubled in recent years. It now costs nearly £20bn a year. The previous government wanted to do something about it and suggested limiting tax relief for those earning more than £150,000. However, critics said that the scheme was overcomplicated and unworkable. These proposals are a replacement for that scheme and are expected to save £4bn a year.
WHAT HAS BEEN PROPOSED?
The proposals reduce the amount you can contribute into your pension every year and still get tax relief – which is known as the annual allowance – from £255,000 a year to £50,000. This might seem like a big cut, but most people do not contribute anything like that amount. The Government also proposes to cut the amount someone could save over their life while still receiving the relief to £1.5m from £1.8m.
THAT SOUNDS LIKE A LOT, WILL ORDINARY PEOPLE BE AFFECTED BY THIS?
You can put as much into your pension as you like, so technically if you earned £55,000 a year you could put the lot into your pension pot and then be over the threshold. In reality, the Treasury calculates that 80pc of those affected by the tax changes will be those on more than £100,000 a year.
However, if your income is ''lumpy'', that is, you get large amounts of money one year and less in another, or you were intending to sell a business or property late in life and then put the proceeds in your pension pot, you may fall foul of the drop in the annual limit.
THAT'S ME! WHAT IF I WANT TO PUT IN MORE THAN £50,000 IN ONE YEAR AND NOTHING IN OTHERS?
It looks like the Treasury has tried to provide for that. If you want to put a large amount of money in your fund one year, it appears from the proposals that you will be able to carry forward three years of unused contributions. So although it will be more difficult to put in large amounts of money, it will still be possible.
IT'S EASY TO VALUE A DEFINED CONTRIBUTION PENSION SCHEME, BUT MINE IS A FINAL SALARY SCHEME. WHAT IS PROPOSED FOR THEM?
Final salary schemes are trickier, because if you get a significant pay rise this is interpreted as a contribution into your pension. Up to now, your contribution has been deemed to be the increase in your annual pension benefits multiplied by 10. But following advice from the government actuary, this factor will be raised from 10 to 16. This means that it will be easier to exceed the new lower annual allowance.
AND WHAT HAPPENS IF I DO GO ABOVE IT?
You face a big tax bill. This is most likely for those who are long servers in final salary defined benefit schemes with generous accrual rates. You will have to pay tax on the part of your contributions that exceeds the £50,000 limit. However, because the proposals recognise this may happen, you can carry forward unused allowance for previous years, as above.
WHAT IF THAT'S NOT ENOUGH?
Because people probably don't want to pay pension tax out of their immediate income, the Government has said it will introduce "further measures" to ensure that people don't have to pay large tax charges from their income. It is considering options including allowing pension schemes to pay the tax charge on behalf of their members. Alternatively, the tax could be rolled up until the individual takes his or her pension.
I THOUGHT THAT THE MAXIMUM TAX RELIEF ON PENSIONS WAS GOING TO BE 20PC. IS THAT NOT HAPPENING NOW?
The documents don't mention it and most people had expected all changes of this nature to be announced together. So this seems less likely now.
WHEN DOES THIS ALL COME INTO FORCE?
The lifetime allowance cap comes in from April 2012, although there are expected to be some transitional measures for those heading towards pension pots between £1.8m and £1.5m. The annual allowance will be cut from April 2011, so if you want to put between £50,000 and £255,000 into your pension pot in a lump, try to do it before then.
IF MY PENSION SAVINGS ARE LIKELY TO BE ABOVE THE ALLOWED RATE, WHAT ARE MY ALTERNATIVES?
Pension saving above the annual allowance is going to be tax-inefficient. Savers should look for other options, for example Isas, offshore bonds and National Savings. Savers pursuing these routes, however, should take care with specific alternatives that the Government is targeting with anti-avoidance, which include employer-financed retirement benefit schemes and employee benefit trusts.
The Government has cut the amount we can save tax-free. Our Q&A explains the impact.
By Rosie Murray-West
Published: 9:51AM BST 15 Oct 2010
The announcement on pension tax relief was welcomed by many who had feared that relatively modest pension pots could be hit by the changes. Treasury estimates suggest that 100,000 people will be affected, far fewer than the half a million originally feared. Read on for what has been suggested and how it might affect you.
WHY IS THE GOVERNMENT CHANGING PENSIONS AGAIN?
The cost of giving people tax relief on their pensions has doubled in recent years. It now costs nearly £20bn a year. The previous government wanted to do something about it and suggested limiting tax relief for those earning more than £150,000. However, critics said that the scheme was overcomplicated and unworkable. These proposals are a replacement for that scheme and are expected to save £4bn a year.
WHAT HAS BEEN PROPOSED?
The proposals reduce the amount you can contribute into your pension every year and still get tax relief – which is known as the annual allowance – from £255,000 a year to £50,000. This might seem like a big cut, but most people do not contribute anything like that amount. The Government also proposes to cut the amount someone could save over their life while still receiving the relief to £1.5m from £1.8m.
THAT SOUNDS LIKE A LOT, WILL ORDINARY PEOPLE BE AFFECTED BY THIS?
You can put as much into your pension as you like, so technically if you earned £55,000 a year you could put the lot into your pension pot and then be over the threshold. In reality, the Treasury calculates that 80pc of those affected by the tax changes will be those on more than £100,000 a year.
However, if your income is ''lumpy'', that is, you get large amounts of money one year and less in another, or you were intending to sell a business or property late in life and then put the proceeds in your pension pot, you may fall foul of the drop in the annual limit.
THAT'S ME! WHAT IF I WANT TO PUT IN MORE THAN £50,000 IN ONE YEAR AND NOTHING IN OTHERS?
It looks like the Treasury has tried to provide for that. If you want to put a large amount of money in your fund one year, it appears from the proposals that you will be able to carry forward three years of unused contributions. So although it will be more difficult to put in large amounts of money, it will still be possible.
IT'S EASY TO VALUE A DEFINED CONTRIBUTION PENSION SCHEME, BUT MINE IS A FINAL SALARY SCHEME. WHAT IS PROPOSED FOR THEM?
Final salary schemes are trickier, because if you get a significant pay rise this is interpreted as a contribution into your pension. Up to now, your contribution has been deemed to be the increase in your annual pension benefits multiplied by 10. But following advice from the government actuary, this factor will be raised from 10 to 16. This means that it will be easier to exceed the new lower annual allowance.
AND WHAT HAPPENS IF I DO GO ABOVE IT?
You face a big tax bill. This is most likely for those who are long servers in final salary defined benefit schemes with generous accrual rates. You will have to pay tax on the part of your contributions that exceeds the £50,000 limit. However, because the proposals recognise this may happen, you can carry forward unused allowance for previous years, as above.
WHAT IF THAT'S NOT ENOUGH?
Because people probably don't want to pay pension tax out of their immediate income, the Government has said it will introduce "further measures" to ensure that people don't have to pay large tax charges from their income. It is considering options including allowing pension schemes to pay the tax charge on behalf of their members. Alternatively, the tax could be rolled up until the individual takes his or her pension.
I THOUGHT THAT THE MAXIMUM TAX RELIEF ON PENSIONS WAS GOING TO BE 20PC. IS THAT NOT HAPPENING NOW?
The documents don't mention it and most people had expected all changes of this nature to be announced together. So this seems less likely now.
WHEN DOES THIS ALL COME INTO FORCE?
The lifetime allowance cap comes in from April 2012, although there are expected to be some transitional measures for those heading towards pension pots between £1.8m and £1.5m. The annual allowance will be cut from April 2011, so if you want to put between £50,000 and £255,000 into your pension pot in a lump, try to do it before then.
IF MY PENSION SAVINGS ARE LIKELY TO BE ABOVE THE ALLOWED RATE, WHAT ARE MY ALTERNATIVES?
Pension saving above the annual allowance is going to be tax-inefficient. Savers should look for other options, for example Isas, offshore bonds and National Savings. Savers pursuing these routes, however, should take care with specific alternatives that the Government is targeting with anti-avoidance, which include employer-financed retirement benefit schemes and employee benefit trusts.