Big pension changes

HM Treasury has just announced some big changes to the pension contribution annual allowance and the lifetime allowance applied to pension funds.

From April 2011, the annual allowance will be cut from the current level of £255,000 to £50,000.

This replaces the complex tapered higher rate income tax relief proposals made by the last government, which have resulted in ‘anti-forestalling’ measures on pension contributions for the past two years.

It means that investors will be able to contribute up to 100% of their salary into a registered pension scheme, subject to an annual cap of £50,000. The reduced limit remains higher than that speculated during the course of the past few days.

The lifetime allowance will be cut in April 2012, from £1.8m to £1.5m. This is the limit on the value of retirement benefits you can draw from approved pension schemes before tax penalties apply.

Over the coming days and weeks we will be digesting this announcement and considering the implications for our clients.

At this early stage, it is positive to see the government commit to protecting lower earners who could suffer from a lower annual allowance if they experience ‘spikes’ in their pension accrual. It looks like they will introduce some form of ‘carry forward’ of unused annual allowance.

There is no doubt that these are significant changes. They do appear to be a lot simpler than those proposed by the previous government. However, they still fall into the same old trap of applying short-term thinking to a long-term planning requirement.

The government needs to balance the awful state of the public purse with a need to encourage more pension provision for the future. Setting and changing pension legislation on an annual basis, based on political whim, is a terrible way to address pension planning.