In its June Budget, the Government announced that it would look at a new, simpler approach to restricting pensions tax relief for high earners based around a new reduced annual allowance. The move reflected feedback received from many in the pensions industry (ourselves included) about the complications of the previous Chancellor of the Exchequer's approach.
This issue will not go away, much to the disappointment of many, and the changes are still planned for April 2011. The Treasury published a discussion document at the end of July. We have finalised our response to it and await the Government's formal proposals, which have been promised for the end of September.
It is not too late if anyone wants to send in comments or suggestions. Here's a link to the consultation document.
The reduced annual allowance approach, as currently proposed, is a blunt instrument which may catch people with income under the £130,000 previously regarded as "high earnings".
From April 2011 an individual earning, for example, £80,000 planning a large contribution to a pension scheme (for example, on redundancy) may find they will exceed the new annual allowance (expected to be between £30,000 and £45,000).
This could land them with a very large tax charge. Each individual will be expected to make sure they do not breach the new allowance. This is much easier to achieve in the defined contribution environment than for members of defined benefit pension schemes.
The detail is still far from clear, but there will inevitably be changes for defined benefit schemes in particular. These schemes are likely to have to align pension input periods with the tax year and to tell all members how much of their annual allowance they have used.
Under the current proposals, there's a new flat rate defined benefit conversion factor in the range of 15-20:1 compared with the current 10:1 so suddenly pensions savings become materially more expensive.
If the Government proceeds as anticipated, some people (principally those with relevant income under £130,000 and so not subject to the existing anti-forestalling provisions in the shape of the Special Annual Allowance Change regime) might be thinking about making contributions while they still can. However, it's not inconceivable that the new administration will bring in a few anti-forestalling provisions of its own to crack down on enhanced pension saving in advance of April 2011.
As always, individuals should take independent financial advice before taking decisions on these points.