On 24 November 2008, the Chancellor delivered his pre-Budget report. Measures affecting pension schemes did not feature heavily but the lifetime allowance (LTA) and the annual allowance (AA), which were both introduced on A Day as part of the tax simplification regime, will be frozen at their 2010/11 levels for the following five tax years.
This will affect individuals with a pension fund worth more than £1.8 million who do not have existing transitional protection. It will also affect those who make an annual contribution higher than £255,000 to a registered pension scheme.
If individuals take benefits or pay in contributions in excess of these allowances, tax penalties of 55 per cent to the LTA and 40 per cent to the AA will apply. The decision to freeze these allowances also affects low earners. The relevant legislation currently permits individuals over 60 to cash in a pension as long as it does not exceed 1 per cent of the LTA.
The decision to freeze the limit will affect people on low incomes who wish to cash in relatively small pensions.
Comment: these changes are an unwelcome move at a time when pension saving should be encouraged rather than penalised. High earners may wish to rethink their long-term pension strategy to avoid losing out on potential tax savings. It could be more tax-efficient for high earners to delay making contributions if higher rate tax relief becomes available at 45 per cent.