By TIM STALKARTT 14/10/2010
The recent announcement from the Treasury is set to make pension rules much simpler.
Annual Allowance – up to £50,000 for all
From April 2011 the annual allowance for pension savings will be 100% of earnings with a cap on contributions at £50,000, (down from the previous £255,000). This contribution will continue to receive income tax relief at the contributor’s marginal rate of tax. This is good news for higher rate tax payers who will again be able to enjoy full relief on their contributions, either at 40% or 50%.
The Government have further proposed that unused allowance from the three previous years will be carried forward, so this suggests that a single contribution of £200,000 could be made in one tax year if no contribution had previously been made. It is not clear whether the contribution would be related back to previous years’ earnings. This will apply to all pensions.
Lifetime Allowance – reduces to £1.5million from April 2012
From April 2012 the lifetime allowance will be reduced from £1.8 million to £1.5 million. This is the total value of all pension arrangements when benefits are taken, above which you will be charged additional tax. The Government have recognised that some individuals may have already exceeded this limit and they are consulting on options to ensure that the changes will not be retrospective.
Although £1.5 million sounds like a lot of money actually the kind of pension it would buy once an investor has taken 25% tax free cash (£375,000) is worryingly low (see some example calculations below which all assume an RPI linked annuity with a 50% dependant’s pension).
Scenario 1 – An Annuity purchased by a man aged 65 with a wife age 62 would pay an interest rate of 3.572% and produce a gross income of £40,185.00 per annum, or £30,254.30 after tax. That is £2,521.19 per month.
Scenario 2 - An Annuity purchased by a woman aged 65 with a husband age 68 would pay an interest rate of 3.6465% and produce a gross income of £41,023.13 per annum, or £30,832 after taxes. That would be £2,569.38 per month.
Final Salary Pensions
Middle earners in Final Salary Schemes who enjoy large pay increases or are promoted could find they face tax bills as the value of their increase exceeds £50,000.
Our Financial Planners are currently assessing the detailed implications of the proposals and in respect of the Lifetime Allowance we need to await the final legislation before we are able to provide more guidance.
In the meantime if you would like to discuss the likely implication of these changes in more detail or if you have any questions at all relating to your SIPP portfolio, please call us on 020 7189 9999.