News
Changes to Pensions Tax Relief: Annual Allowance and Lifetime Allowance for all Pension Schemes
17/11/2010
The Coalition Government announced on the 14 October 2010 it’s approach to restricting tax relief on pension contributions. Whilst the broad thrust of the reforms could be welcomed as they mainly targeted higher earners the impact of the changes can have implications in certain circumstances that could adversely impact upon mid-earners throughout the public services.
Click here for PDF version
The main elements of the changes are as follows:-
· From April 2011, the annual allowance for tax-privileged saving (ie pension contributions to a defined contribution scheme or ‘deemed contributions’ to a defined benefit scheme) will be reduced from £255,000 to £50,000 per annum.
· The lifetime allowance (LTA) will be reduced from £1.8 million to £1.5 million from April 2012. The lifetime allowance is the value of pension benefits which an individual can accrue over his/her lifetime without incurring a tax charge.
· The ‘deemed contributions’ to a defined benefit (DB) scheme, such as the Civil Service Superannuation Schemes, the NHS Scheme and the LGPS (NI) will be calculated using a ‘flat factor’ of 16. This means that an increase in annual pension benefit of £1,000 would be deemed to be £16,000.
· In recognition of one-off spikes in pension accruals under DB schemes it is proposed that unused allowance from up to three previous years can be carried forward to offset the excess contribution. An allowance of £50,000 will apply to each of the previous years.
· A consultation on a range of options for payment of any tax charges incurred will follow. It is suggested that, in some cases, the charges could be paid from the pension fund and the member’s benefits reduced accordingly.
The impact of these changes will reduce the overall value of pensions tax relief by approximately £4bn per annum. Whilst over 80% of those affected will be earning in excess of £100,000 per annum it does mean that within public service defined benefit pension schemes it is possible to get “one-off spikes” in accrual due to promotion for example. The final detail on the changes are still under consideration by the Treasury and HMRC, with the detailed legislative clauses to be included in the Finance Bill which is to be published in December.
All pension schemes will be required to inform scheme members where pension savings exceed the reduced annual allowance (currently £50,000) for the relevant tax year, along with the information for the three preceding tax years. This must be provided by the 6 October following the end of the tax year. In addition Scheme members can request details of the pension savings assessable over the relevant tax year and/or the three proceeding tax years. That information must be provided by the relevant Scheme administrator by the latter of 6 October following the end of the tax year; and 3 months of receiving the request.
Another factor to be taken into account is that under the new regulations there is no exemption given for voluntary retirement/severance or redundancy enhancements. This could affect members and if so some easement may be obtained via utilisation of any amounts of unused allowance from the three preceding tax years.
The Annual Allowance is therefore based on the totality of what are classified as “deemed contributions”, which covers all contributions paid by the scheme member and the employer, inclusive of any AVC contributions and any payments into a partnership pension account, a stakeholder pension or to a personal pension; plus the value of benefits built up in the Occupational Pension Scheme. Any deferred pensions are exempt from the new annual allowance regulations.
The fine print of the regulations have yet to be finalised and it will be from the tax year coming on 6 April 2011 that the new limit of £50,000 applies from, so the impact will be applied post the end of the 2011/12 tax year. In addition unused allowances for the 2008/09, 2009/10 and the 2010/11 can be carried forward. Members can obtain taxation advice from NIPSA’s Auditors Dawson Nangle Tumelty and/or personal financial advice from Platinum Financial Services (see the NIPSA website www.nipsa.org.uk for contact details).
Annex A shows two worked examples, one which falls within the new annual allowance and one which exceeds the annual allowance.
Should further information and/or clarification be forthcoming from the Finance Bill to be published in December a further circular will be issued.
Yours sincerely
BUMPER GRAHAM
Assistant General Secretary
« back