6 April will not only herald changes to tax allowances, but once again there will be further changes to pension rules. From the start of the 2011-12 tax year, there will be changes to how much you can save into a pension. Annual Allowance – Contributions
Since 6 April 2006, people have been allowed to save 100% of their earnings into their pension subject to an "annual allowance", which was £255,000 in 2010 --11 tax year. Also the situation was made more complex by the anti-forestalling legislation introduced in April 2009, which ultimately restricted the tax relief on pension contributions for those earning more than £130,000. Not a positive move for pensions. However, from 6 April this allowance will be scrapped in favour of a reduced annual allowance for all investors of £50,000.
On the face of it this may not appear to be too generous, compared with the previous limits. However there will also be a facility to carry forward three years-worth of unused annual allowances, at £50,000. Therefore subject to earnings and previous contributions, you could invest up to £250,000, with full tax relief, into your pension in the course of a tax year. This could give a major boost to your pension planning.
The Lifetime Allowance
This is currently set at £1.8 million, but will be reduced to £1.5m from 6 April 2012. This was the level it was initially set at in April 2006. For those with actual or notional pension funds approaching or exceeding this limit, advice should be sought on the options and transitional arrangements.
There will be a new form of protection called "fixed protection", available to those expecting their pension savings to breach the £1.5m mark when they come to draw their benefits. If you have already registered for "enhanced" or "primary" protection, this will not be an option.
To avoid breaching the lifetime allowance, you could consider stopping membership of your pension. Speak to your employer to see if it will give you other benefits, such as a higher salary, instead of pension contributions.
If you're approaching retirement, you could retire early - before April next year - to ensure you benefit from the higher lifetime allowance. Alternatively, you could continue to work but simply crystallise your pension benefits earlier than planned.
Pension rules in the UK continue to be complex and the interaction between accumulated funds, the increased flexibility at retirement, and the limits, all mean that advice is necessary regardless of what stage of life you are at.