On 14 October 2010 the Treasury
announced a significant reduction in the amount of pension savings which can
benefit from tax relief.
From April 2011, the annual allowance will be reduced from £255,000 to
£50,000 and from April 2012 the lifetime allowance will be reduced from £1.8m
The announcement followed the publication of a discussion document Restrictions of pensions tax relief on 27 July 2010, responses to
which were required by 27 August. A summary of responses and draft legislation
covering the changes to the annual allowances were published at the time of the
ministerial statement in October.
Draft clauses and draft guidance on the reduced lifetime allowance,
together with a revised set of draft clauses on the annual allowance, were
published on HMRC’s website on 9 December 2010.
The draft Finance Bill clauses and explanatory notes have also now been
published on the Treasury website. The full Finance Bill 2011 is due to be
published on 31 March 2011.
In addition to the reduction of the annual and lifetime allowances, the
proposals include the following measures:
- tax relief
for pension saving up to the new annual allowances will be granted at a
taxpayer’s marginal tax rate, with any excess taxed as income through
- a three year
carry forward rule that allows individuals to carry forward unused annual
allowance for the last three tax years
- an exemption
from the annual allowance charge in the year of taking benefits in cases
of severe ill health
rules for the annual allowance applicable from 14 October 2010
- the valuation
factor used to calculate the value of defined benefits pension savings
will increase from a factor of 10 to a factor of 16
- from 6 April 2011 the exemption from the annual
allowance for those with enhanced protection will no longer apply.
- a new ‘fixed
protection’ for people who have already built up pension savings in the
expectation that the lifetime allowance would remain at £1.8m. Fixed
protection will allow the opportunity to apply for a lifetime allowance of
£1.8m on the condition that no new contributions are made
with enhanced protection or primary protection will not be entitled to
for fixed protection will have to be made to HMRC before 6 April 2012.
The special annual allowance rules introduced by the previous government
will be repealed.
The Treasury has also published a discussion document concerning options
to meet high annual allowance charges from pension benefits and has invited
comments by 7 January 2011.