On 19 July 2011, the Finance (No 3) Bill 2011 received Royal Assent and became the Finance Act 2011 (the "Act"). We consider below the key changes introduced by the Act:

  • Reduction in the annual allowance from £255k to £50k from 6 April 2011. The Act also makes changes to how benefits are to be measured against the new annual allowance, including the introduction of a "3 year carry forward rule" which allows any unused allowance from the past three years to be carried forward to the current year to give a higher annual allowance in the current year. For our update discussing these changes in detail, click here.
  • From 6 April 2012, the lifetime allowance will be reduced from £1.8m to £1.5m.
  • Scheme Pays facility: where a member has an annual allowance charge (across all schemes of which he is a member) of £2,000 or more and whose pension input amount in relation to a particular scheme exceeds the £50k annual allowance, the member can choose to have their tax liability met from their pension entitlement and have their benefits reduced accordingly. It is mandatory for schemes to provide this facility from 11 August 2011. For more on Scheme Pays, click here.
  • Changes to pension input periods ("PIP"s). Before, the PIP began on the date benefits started to accrue and ended on the anniversary of that date, which created problems for schemes who wanted to align their PIP with the tax year. The Act amends this so that unless another date is nominated, a member's PIP will now end on 5 April – for more about the changes to PIPs, click here.
  • The Disguised Remuneration provisions, which, 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. HMRC have published FAQs in connection with these provisions. 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 pensions schemes are, therefore, excluded from these provisions. Employer funded unapproved retirement benefits schemes may, however, be caught under certain circumstances.
  • There will no longer be a requirement to annuitise money purchase benefits at age 75. Instead, members can, if schemes allow it, drawdown their benefits both before and after age 75 through two new drawdown regimes: "flexible drawdown" and "capped drawdown". Given that there is no longer a requirement to annuitise at age 75, many authorised lump sums may now also be paid after the member has reached age 75. For more about these provisions, click here.


We have been advising a number of schemes in connection with the provisions in the Act, in particular around:

  • How benefits under particular schemes (such as schemes closed to future accrual but where there is a salary linkage to deferred members' benefits) are to be measured against the new annual allowance.
  • The scheme pays provisions (for instance how member's benefits should be adjusted if any annual allowance tax charge is paid out of their pension entitlement).
  • Whether or not to make the new drawdown regimes available to members.
  • How the disguised remuneration provisions apply to particular employer funded unapproved retirement benefit arrangements.

For further information about the implications that the Act may have for your scheme, please speak to your usual contact at Herbert Smith.