News Archive - October 2010
More pension changes
14/10/2010
Another year, another overhaul to pension legislation. This time it looks like iit might actually have the efffect of simplifying things for many pension savers. Some will undoubtedly be worse off, but in the main the changes will effect only high earners (those who earn over £150,000 per year, and people in final salary pensions who have high salaries and get large pay increases).
The aim is to cut the cost of pension tax relief for the Government. The first change is to reduce the maximum annual level of pension contributions down to £50,000. This limit wil be introduced on 6 April 2011. Any contributions in excess of the limit will attract a tax charge which will remove any tax relief granted. In order to accommodate those who have a one-off increase in pension benefits in one year, there will be a system whereby any unused allowance from 3 previous years can be carried forward and used. This will help those who wish to make a one-off payment into a pension for tax reasons - for example, people with large redundancy payments.
The lifetime allowance (put simply, the maximum value of all pension pots without incurring any tax charges) will reduce from £1.8 million to £1.5 million with effect from 6 April 2011. Again, this lifetime allowance currently affects a very small percentage of pensioners.
For final salary pensioners, the rate at which their pension accrual is converted into a notional annual pension contribution will increase from 10:1 to 16:1. This is best illustrated by an example. A member of a final salary pension works for 1 year and earns £30,000 per annum. If it is a 1/60th scheme then their pension entitlement increases by £500 p.a in that year. Previously this would have been treated as if they had contributed £5,000 to their pension (£500 X 10). From April 2011 the notional contribution would be £8,000 (£500 X 16).
As the example shows, the new annual limit of £50,000 wlil only catch those who have a large leap in salary. They could still use unused allowances from previous years to reduce any tax charge.
I welcome the changes as part of the overall plan to trim government spending. They are designed to retain the tax benefits of pension savings for the majority of the population. In fact they have some features of previous pension legislation - annual pension contributions to personal pension prior to April 2001 were limited depending on a person's earnings and their age.There was also a system of carried forward tax relief that was phased out.
Some newspapers refer to 'pension stealth taxes' , but in truth those who will be affected by these changes will tend to have other assets and means of providing for themselves in retirement.
If this is all double dutch to you, don't worry - come and speak to Mulberry Financial and we can guide you through the changes.
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