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Pensions tax changes

22nd October 2010

The government has announced a new pension tax regime effective from April 2011. This replaces the complex rules proposed by the previous government designed to reduce the cost of pension tax relief. A reduced annual allowance for pension contributions and an increase in the valuation factor applying to defined benefit pension schemes are the most significant elements of the announcement.

These combined with other important changes to the system of pension tax relief requires the attention of your employees to ensure they are aware of the risks and opportunities that will exist under the new regime. These include:

Risks

  • tax charges if contributions exceed the reduced annual allowance
  • increase in the valuation factor applied to defined benefit pension schemes
  • certain exemptions from the annual allowance are to be removed
  • reduced lifetime allowance from April 2012
  • significant restrictions intended for unapproved pension arrangements

Opportunities

  • increase pension contributions post ‘anti-forestalling’
  • the availability of ‘carry forward’ relief
  • tax relief at individual’s marginal tax rate including the additional 50% tax rate
  • valuable combination of pension and ISA

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