In our Quarterly Review last November, we outlined the Government’s proposals for the tax treatment of high earners. In broad terms, these proposals will limit individual’s tax-relieved pension saving for any year to the new annual allowance of £50,000 from 6 April 2011.
In December 2010, the Government issued draft amendments in the Finance Bill 2011, which contains details of the changes to both the annual allowance and lifetime allowance. In particular:
- Further details were given of what conditions need to be met in order for a member to come within the exemption from the annual allowance charge for retirement on grounds of severe ill-health. The test will be that a doctor must have confirmed that the member is suffering from ill-health which makes him or her “unlikely to be able to undertake gainful work (in any capacity) at any time in the future (otherwise than to an insignificant extent)”. In practice, this is likely to mean that, in many cases where an ill-health retirement pension allows for additional years of service, that enhancement triggers an annual allowance charge.
- The Government has confirmed that the reduction in the lifetime allowance from £1.8m to £1.5m will apply from 6 April 2012.
- For these members who opted for primary protection or enhanced protection after the 2006 changes to the pensions tax regime, the protection will be based on the greater of the standard lifetime allowance and a new “underpinned” lifetime allowance of £1.8m.
- There will be a new “frozen” lifetime allowance of £1.8m for members who expect their current pension savings to grow to more than £1.5m through investment returns alone when they come into payment and who agree to cease future accrual.
- The limit for trivial commutation lump sums will be set at a monetary amount of, initially, £18,000, rather than 1% of the lifetime allowance. This means there will be no immediate changes to the limit when the lifetime allowance reduces to £1.5m.
One immediate action for pension scheme trustees is to consider whether to nominate a “pension input period” for annual allowance purposes where they have not already done so. If no pension input period has been nominated, then the pension input period will be 7 April to 6 April. Trustees can nominate a different pension input period by notifying the affected members but this must be done before 6 April 2011, when the legislation will change. If they are nominating a different pension input period, trustees will need to state that it takes effect retrospectively, from the 2006-2007 tax year.
Trustees may also find employers approaching them over the next few months with proposals for scheme amendments both to address the position of senior employees who will be affected by the reduced annual and lifetime allowances and also more generally the approach to ill-health retirement.