HM Treasury has today confirmed that changes to pensions tax relief first proposed in June's Emergency Budget will go ahead with effect from April 2011. The announcement follows a short period of informal consultation on the proposals during which employers, trustees and interested parties were invited to submit their views. The changes signal a departure from the complex high-earner charges proposed by the previous Government, and it is envisaged that they will raise an estimated £4 billion in additional revenue for the Government.

The key features of the announcement are as follows:

  • The annual allowance will be reduced from £255,000 to £50,000 with effect from April 2011. Individuals who exceed the allowance owing to one-off "spikes" in accrual will be permitted to offset any excess against unused allowance from the previous three years
  • The lifetime allowance (LTA) will be reduced from £1.8 million to £1.5 million. This change is expected to take effect from April 2012
  • The factor used for valuing defined benefit "contributions" will be increased from 10 to 16 (that is, for every £1 a year payable from pension age, the value will be taken to be £16 rather than £10). The change will mean that more people in receipt of defined benefits will exceed the annual allowance. However, the "smoothing" mechanism referred to above, which allows carry-forward of unused allowance, gives some scope for members to "average out" significant pay rises
  • Funded unregistered top-up arrangements (known as EFRBS) will be treated in such a way as to ensure that they are less attractive than other forms of remuneration
  • A protective regime will be put in place for benefits valued in excess of the new LTA at 6 April 2012 (such protection to be capped at the current LTA of £1.8 million). It is anticipated that there will also be some indexation of the protected benefit value Existing protections introduced under the A-Day regime will be largely unaffected (although it appears that there will be no exemption from the reduced annual allowance)

The announcement is to be welcomed as being less complex than the previous Government's plans from April 2011. A new element not included in the proposals made in the summer is the ability to carry forward unused relief in cases of one-off 'spikes' in accrual.

Employers will now need to act quickly to consider how they might wish to help employees address potential tax issues, for example by significant scheme redesign.