On 14 October 2010, the Government published details of its changes to the pensions tax relief system – more information was given in our client Eview: Pensions tax relief overhaul, on the same date. Also, look out for our special Review for further analysis of the impact of the tax changes.

The reforms are expected to generate about £4bn in annual revenue. The headline points are that from April 2011:

  • The Annual Allowance1 will be reduced from £255,000 to £50,000.  
  • Members will be allowed to offset contributions exceeding the Annual Allowance against unused allowance from the previous three years – this represents a major relaxation since the initial consultation and should reduce the effect of any spikes in accrual (eg as a result of an increased pension contribution or augmentation on redundancy).  
  • To assess accruals in defined benefit schemes the pension built up each year will be multiplied by a factor of 16.  
  • The Lifetime Allowance2 is to be reduced from £1.8m to £1.5m. (The Government is currently undecided on whether this reduction should be implemented in April 2011 or April 2012.) A protection regime will be introduced for individuals who have already made pension saving decisions based on the current higher Lifetime Allowance.  

Employers can now assess how the tax relief changes affect their employees, and both employers and trustees can consider introducing flexibilities into their pension schemes to allow individual members to vary rates of contributions or benefit accrual.

This is a major change to the tax relief system. Some of the finer detail of the proposals will be subject to further consultation over the coming weeks.