Extensive changes to the pensions tax regime took place from 6 April 2011. Here we recap some of the main features of the new regime and, importantly, what actions you should be taking in relation to your own pension provision.
Key features of the new regime
- The annual allowance of pension contributions you can make on which you get tax relief has reduced from £255,000 to £50,000.
- The amount you can save over a lifetime whilst receiving tax relief will be reduced from £1.8 million to £1.5 million from April 2012.
- If you exceed the annual allowance in a given year, unused allowance from up to three previous years will be carried forward to offset against the excess contributions (as long as you were a member of a registered scheme in those years).
- Tax relief will be given at the marginal rate, i.e. if you are an additional rate payer, you will receive 50 percent tax relief on your contributions.
There are still opportunities to make the most of the generous tax reliefs available especially if you are a higher or additional rate tax payer:
Top pension tips
Although the limit on how much and how quickly you can save towards your pension “pot” has decreased, there are still opportunities to make the most of the generous tax reliefs available especially if you are a higher or additional rate tax payer.
- Ensure you are making the most of up to 50 percent tax relief available by making contributions up to the annual allowance.
- Make use of carried forward annual allowances, especially if you have irregular patterns of income or were caught by previous “anti-forestalling provisions”, by making up to £200,000 of contributions this tax year.
- If the value of your pension savings is above or close to the reduced lifetime allowance consider applying for fixed protection. If you opt out of all registered pension schemes before 6 April 2012 you can retain a lifetime allowance of £1.8m.
- Ensure that you do not incur any adverse tax charges by making annual contributions in excess of £50,000 (though see 2nd bullet point).
- Review your pension provision if you are in a defined benefit scheme as it may be easy to exceed the new lower annual allowance.
- Finally, review your pension arrangements as part of wider estate planning as IHT exemptions may be available in relation to excess income or lump sum death benefits.
What are the alternatives?
Undoubtedly the pension tax regime is very favourable, however, due to the new limits on the amounts you can put into a pension scheme, alternative strategies should be considered – More on the ‘Maximum Investment Plan’ in my next blog.