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Annual allowance slashed, Lifetime allowance reduced

The treasury has confirmed that the annual allowance for tax free pension contributions will take a massive cut, going from the existing £255,000 allowance to a mere £50,000. They have also confirmed that the lifetime allowance will be reduced from £1.8m to £1.5m.

These changes have been made to replace the complex proposal legislated by the last government in the Finance Act 2010 and to target those individuals who make significant pension contributions. This change in annual allowance will affect 100,000 pension savers with 80% of them having incomes in excess of £100,000pa. So any contributions that exceed the £50,000 cap will be subject to the individual’s marginal rate.  For the Lifetime allowance the tax charges will remain at 55% for a lump sum and 25% if it is paid as an annual pension.

However the government have made the point that people who make one-off larger contributions will not be at too much of a disadvantage as they will be able to use unused allowances from previous years, over a 3 year period. Therefore in the treasury’s terms “protecting individuals on low and moderate incomes as far as possible”.

The original plans were to reduce the annual allowance to around £30,000 - £45,000 which the government believed would have achieved the desired objective, however with the Lifetime allowance also being reduced it enables the allowance to be set at £50,000.

The revised annual allowance will take effect from April 2011 onwards and the lifetime allowance will come into effect from April 2012. Another report will be released at a later date to discuss how to approach the pensions that will be exceeding the lifetime allowance as of April 2012 i.e. pensions with a value between £1.5m and £1.8m.

Matthew Rankine

Oct 18, 2010