Reduced annual allowance
The annual allowance will reduce from £255,000 to £50,000 from 6 April 2011. The Government will consider indexing from April 2016.
Carry forward makes a come back. As the new annual allowance is significantly lower and to allow some flexibility, any unused allowance from the three previous tax years can be carried forward to offset contributions above the annual allowance in a single year. The new £50,000 annual allowance will apply retrospectively to tax years 2008/2009, 2009/2010 and 2010/2011 for this purpose. This allows carry forward to start in tax year 2011/2012.
Pension input periods will not be aligned with the tax year. Where the pension input period started before 14 October 2010 there are two tests:
There are some useful examples in the Treasury's response on page 19.
The annual allowance will not apply on death or on serious ill-health. The Government will consider allowing an exemption for ‘major’ ill-health.
No exemption in the year benefits are taken, on redundancy or for those who have claimed enhanced protection.
Defined benefit accruals will be valued using a factor of 16, currently 10. This means that the maximum benefit accrual in one year that’s within the new annual allowance limit is £3,125. Using carry forward could increase this.
The value of benefits at the start of the year can be increased by CPI to make an allowance for inflation. Negative values aren’t allowed, so any reduction in benefit over the year will have a value of zero.
No test needed for deferred members.
Tax relief at full marginal rate is available on contributions paid within the new limit.
No tax relief on contributions above the new limit. The annual allowance charge is tailored to remove any tax relief given.
The Government is considering how unexpected annual allowance charges can be paid from the pension.
Employers continue to get tax relief on pension contributions in the normal way.
The lifetime allowance will reduce from £1.8 million to £1.5 million. This is expected to be from 6 April 2012 but could be earlier.
Defined benefits will continue to be valued using a factor of 20 for now.
The Government will consult on a protection regime for those already above the new reduced lifetime allowance of £1.5 million.
No changes put forward for primary and enhanced protection.
The trivial commutation limit is fixed at £18,000.
Link to the Treasury's response
Published 15 October 2010
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