High earners: The Coalition's plans for restricting pensions tax relief

The Government has published its final plans for the restriction of pensions tax relief.

The new Annual and Lifetime Allowances

The Annual Allowance (AA) limits the amount of tax relief available on pension savings paid by or in respect of an individual to a registered pension scheme. Where pension savings exceed the AA, an AA charge applies.

From April 2011 (when the existing anti-forestalling provisions will fall away, see High earners: Transitional restrictions on tax relief), the AA will be £50,000 (and may be indexed after the tax year 2015/16). While this represents a significant reduction on the current AA of £255,000, it is higher than the Coalition's original proposals for an allowance of between £30,000-£45,000.

Individuals who exceed the AA due to one-off spikes in accrual will be able to set-off excess contributions against unused allowance from up to three years previous. The Government will also consult in November on options to enable tax charges to be met out of an individual's pension.

A reduced lifetime allowance (LTA) of £1.5 million (down from the current £1.8 million) will complement the new AA, with transitional protection for those whose savings are based on the current LTA.

What next?

The Government estimates that 100,000 pension savers will be affected by the drastic reduction in the AA, and that this measure should generate around £4 billion annual revenue. This is comparable to the revenue which Labour's plans were predicted to achieve, the Government's overriding objective in putting forward its alternative approach.

With a higher AA than originally proposed and a revaluation factor at the lower end of the Government's proposed range, wholesale scheme re-design may not be needed in many cases. However, employers will need to identify as soon as possible those individuals with accrual that would regularly take them above the AA and consider possible alternatives.

Provisions to enact the reduced AA and LTA will be included in the Finance Bill 2011.