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Dramatic changes to pensions
The rules governing pensions are being radically changed this April and next.
Substantial reductions are being made to the annual and lifetime allowances for contributions, and the requirement for pension savers to buy annuities by the age of 75 is being abolished. Both will have far reaching consequences for many pension savers, especially those saving large amounts into pensions, or those belonging generous final salary schemes, as they could trigger large tax bills. The changes have been deemed necessary because the cost of tax relief on pensions has doubled in recent years to about £19bn in 2008-09.
The change means that the annual allowance (the amount of pension contributions on which individuals can get tax relief) will be reduced from £255,000 to £50,000 from April 2011. Once you do go above the allowance, you will have to pay tax on that part of your contributions that exceeds the £50,000 limit. It also means that the amount someone can save over a lifetime while receiving tax relief will be cut from £1.8m to £1.5m. The government says these changes will generate about £4bn annual revenue and that changes to the limits will only affect 100,000 people – the highest earners who can afford to make the biggest contributions.
So what will be the likely effects of these changes? You can put as much into your pension as you like, so if you put £55,000 into your pension pot, you would then be over the threshold. Similarly, if your income is such that you tend to get large amounts of money one year and less in another, or you intend selling a business or property late in life and then putting the proceeds in your pension pot, you may fall foul of the drop in the annual limit.
However, the proposals appear to deal with this, in that if you want to put a large amount of money in your fund one year, 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.
Those on final salary schemes may find themselves falling foul of the new rules, because if you get a significant pay rise this is interpreted as a contribution into your pension. This means that it will be easier to exceed the new lower annual allowance, in which case you will face a large tax bill.
At Census, we are helping savers to look for other options, for example Isas, offshore bonds and National Savings. However, we would urge savers pursuing these routes to take care with specific alternatives that the Government is targeting with anti-avoidance. These include employer-financed retirement benefit schemes and employee benefit trusts.
Paul Dixon – Chartered Financial Planner