The Budget 2011 commentaries - Pensions & investments
The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication.
Restricting pensions tax relief
We had already been forewarned about the changes to tax reliefs on pension contributions and pension benefits before and at age 75.
These were announced on 14 October 2010 and have been confirmed as follows:-
Annual allowance
The annual allowance on which tax relief will be given will be reduced from £255,000 to £50,000 as of 6 April 2011.
Comment: For the past two tax years those earning more than £150,000 (including their pension contributions) were, effectively, limited to tax relief at their highest rate on contributions of no more than £20,000 except in specified circumstances.
The changes increase the contributions that high earners can get tax relief on at their highest marginal rate to £50,000.
This allowance replaces the complex tapering provisions which had been proposed by the previous Government and, all in all, the change is welcomed.
Tax relief on pension contributions has, for many years, been seen as a possible target. However, it is only in the past two years that Governments have looked to reduce the relief available and as a result we should not take for granted that these reliefs will remain for the long term.
Carry forward of unused relief
As of 6 April 2011 it will be possible to bring forward unused annual allowance from the previous three fiscal years. For those years falling before 2011/12, the possible unused annual allowance is measured against a notional £50,000 limit.
The ability to carry forward will be dependent on the individual having a registered pension scheme in those prior years rather than relevant earnings.
Comment: The reintroduction of the carry forward of relief was initially designed to help those with defined benefit schemes who have large pay rises. However, this change will bring opportunities for those limited by the special annual allowance charge in 2009/10 and 2010/11 to catch up in 2011/12. As tax relief on pension contributions at higher rates is still potentially a target this is an opportunity that investors should consider carefully.
Lifetime allowance
To the extent that individuals accumulate more than £1.8m in pension plans the excess is subject to a 55% tax charge.
As of 6 April 2012 the lifetime allowance will be reduced to £1.5m.
Those individuals affected may elect by 5 April 2012 to adopt the current £1.8m lifetime allowance going forward although they will not be able to accrue any further pension benefits after that date.
Comment: By reducing the lifetime allowance HMRC is limiting the amount of tax relief that any one individual can receive on their pension contributions over their lifetime.
Those with pension funds close to the £1.5m limit may need to address their strategy going forward and consider vesting and/or electing for the new form of protection by 5 April 2012.
Those who already have enhanced and primary protection are not affected by these changes.
Pension annuitisation at age 75
Currently individuals must vest their pension plans when they reach 75 and either buy an annuity or enter into a plan, from which they are obliged to draw an income.
From 6 April 2011 an individual will not be required to purchase an annuity at age 75 although their tax-free cash will be fixed at that date. If an individual does not vest their pension plan and subsequently dies after age 75 the remaining fund will be subject to a 55% tax charge, and they will lose their entitlement to the 25% tax-free cash.
Comment: Whilst these rules do enable individuals to pass on up to 45% of their remaining pension schemes on death they are not perhaps as flexible as originally thought. There is a possibility that deferring tax-free cash post 75 could mean it is lost and the death benefit rules for those with unvested schemes are less favourable than they are currently for those who have not reached 75.
Releasing your pension fund
New rules have been introduced to allow individuals who can demonstrate that they have secured income of at least £20,000 to withdraw as much or as little of their remaining pension fund as and when they want, although these excess withdrawals would be subject to tax at their highest marginal rate.
Comment: Again this might be attractive to those people who need to access the assets within their pension fund although the imposition of tax could mean that pension funds would be taxed at higher rates if they are withdrawn in one go than they would if they were withdrawn over a long period of time.
Again, whilst welcomed, this rule perhaps does not offer the flexibility that it might seem at first sight.