On 14 October, the Government announced its proposals on high-earner pensions tax relief. These replace the previous administration’s proposals for an income-based high income excess relief charge.

Under the new proposals, the Government has confirmed that it will reduce the annual allowance (the amount which can be contributed/accrued annually by or on behalf of an individual without incurring a tax charge – currently set at £255,000) to £50,000 from April 2011. There will be a tailored tax charge on the excess to recoup the full marginal rate of relief that an individual has benefitted from.

However, the Government will include a three year carryforward option for members to mitigate so-called spikes in contributions or accrual (as may occur, for example, on a steep promotion). Certain exemptions will apply (for example, pensions savings will not be tested against the annual allowance on the occurrence of terminal illness and death), but the Government has so far rejected pressure to include an exemption to cover benefit augmentations on redundancy.

The idea of capping the tax relief available to any individual at 40% (which was mooted in the Government’s July consultation document) has been dropped.

The Government also announced that the lifetime allowance (the overall maximum capital amount of taxrelievable pension savings which any one individual can accumulate in all of his or her pension arrangements in a lifetime) will be reduced from £1.8 million to £1.5 million from April 2012. However, transitional protection will apply to those who have already exceeded the new £1.5 million threshold; the Government will also consider options to protect individuals who had planned for their pension pot to grow to the level of the current lifetime allowance between now and the point of their retirement.

The administrative burden on employers (for example, in connection with the provision of information to members) is limited. However, these proposals will prompt many employers to review their arrangements for high-earners and to look again at certain benefit design issues.

Traditionally, one option for employers who wished to provide top-up pension arrangements for high-earning employees has been to provide an employer-financed retirement benefit scheme (EFRBS). In essence, these are unregistered retirement benefit arrangements subject to their own particular tax regime. However, the Government has announced that funded EFRBSs will be made less attractive than other forms of remuneration. This leaves the position of unfunded EFRBSs open.

Draft legislation is due to be published by the end of the year with a view to the proposals being legislated for in the Finance Bill 2011.