New Pension Rules Just Released

Earlier this year the coalition government announced it would review the complex set of pension rules introduced by the last government to restrict the level of tax relief for higher earners. The outcomes of its review were released on 14th October and are much better than most people expected with a new set of simplified contribution rules. Most changes come into effect next tax year (April 2011) and include:

• £50,000 – the new limit on how much you can contribute into pensions each tax year. From April 2011 you will be able to contribute 100% of your relevant UK earnings, capped at £50,000. Contributions greater than the annual allowance could trigger a tax charge. If you do not use your full allowance in one year you may be able to carry it forward up to three tax years.

• Up to 50% – the tax relief your pension contributions could receive. Basic rate taxpayers will receive 20% tax relief, higher rate taxpayers up to 40% tax relief and 50% rate taxpayers up to 50% tax relief. This is good news for very high earners as many expected tax relief to be restricted to 40%.

• £1.5 million – the total you can hold in pensions from April 2012 without a tax charge. Until 2012 the limit is £1.8 million. There will be provisions to protect pots already in excess of £1.5 million, otherwise anything above the limit when you take benefits is effectively taxed at 55%.

• 16 – the factor used to calculate the value of a final salary pension contribution will rise 60% from 10 to 16 in April 2011 to better represent their true value. Final salary contributions will therefore use up a far larger proportion of the new lowered annual allowance and for high earners may even exceed it triggering a potential tax charge

WHAT THIS MEANS

Pension contribution allowances have been simplified and will change from April next year. You will be able to contribute up to your earnings each tax year, capped at £50,000, and receive tax relief at your highest marginal rate (as much as 50%).

If you currently earn more than £50,000 and your total annual income has not reached £130,000 since April 2008, you have the opportunity to make a contribution in excess of £50,000 before April 2011 to boost your retirement savings.

Investors with pension pots nearing or above £1.5 million should take caution, and active members of a final salary pension should be aware of the change to how their annual contribution is calculated.

Please note this is our early understanding of these rule changes. Full details have not yet been confirmed and are subject to change. Furthermore the value and levels of relief will depend upon individual circumstances.

This article is taken from the SIPP Times by kind permission of Hargreaves Lansdown. You can find more information on their website (www.H-L.co.uk).