The Finance Act 2011 received Royal Assent on 19 July 2011. The Act makes significant changes to the pensions tax regime including:
- A reduction in the annual allowance (which refers to the maximum pension saving that can be made to a pension scheme in a year without triggering a charge to tax, the Annual Allowance Charge) from £255,000 to £50,000. The impact of this change is likely to be significant for defined benefit scheme members but some members of defined contribution occupational pension schemes may also be affected.
- The lifetime allowance (which refers to the total pension saving that an individual can make to a pension scheme during their lifetime) will be reduced from its current level of £1.8 million to £1.5 million from 6 April 2012. Transitional provisions apply, however, allowing members to elect to preserve the current lifetime allowance of £1.8m subject to certain conditions.
- With many more people now likely to have to pay the Annual Allowance Charge, the Act introduces new provisions allowing scheme members to require trustees to pay all or part of the charge out of their benefits under the scheme if certain conditions are satisfied. Called Scheme pays, it is mandatory for schemes to provide this facility from 11 August 2011.
- The Disguised Remuneration rules. These rules, broadly, impose tax charges on “rewards, recognition or loans” made through a third party (such as a trustee) in connection with a person’s employment. In the context of pensions, the key aim of the Government is to prevent unregistered pension schemes from getting more favourable tax treatment than would be available if the benefits were provided through a registered pension scheme, given especially the reduction in the annual allowance. Registered pension schemes are, therefore, excluded. Employer financed retirement benefits schemes may, however, be caught under certain circumstances.
- The requirement to annuitize money purchase benefits by age 75 has been removed. Additionally, scheme members can, if schemes allow it, drawdown their benefits both before and after age 75 through two new income drawdown regimes: “Capped drawdown” (which is subject to an annual maximum) and “flexible drawdown” (which is, broadly, available to people who meet a minimum income requirement of £20,000).