Summary and implications

The government has announced its proposals to restrict pensions tax relief, replacing the complex “high earner” provisions introduced by the previous regime. We will be producing a detailed analysis of the impact of the announcement, particularly how it will affect defined-benefit scheme members – in the meantime the main points to note are:

  • Annual allowance reduced to £50,000 from April 2011. For DB members a flat rate ratio of 16:1 will be used to assess accrual – so an annual accrual of £1,000 will use up £16,000 of the annual allowance. Only active members will be caught by the new provisions and consideration is being given to exempting ill-health benefits.
  • Mitigating against “spikes”. A major concern was that the new restrictions should not catch moderate earners who had a one off “spike” in pension accrual, typically as a result of a redundancy payment. Members will be allowed to carry forward unused annual allowance from up to the three previous years to offset against any excess contribution.
  • Lifetime allowance reduced to £1.5m from April 2012. There will be some protection for those who have already built up pension benefits based on the current allowance of £1.8m – the government has asked for views on how that might operate.