December 2010 Autumn tax updates: Pension Tax Relief
1. Reduction in annual allowance (AA)
In addition to previous announcements revised draft legislation and guidance has been released concerning the reduction of the AA.
Revision / amendments include:
- Potential AA increases in future tax years will be subject to Treasury Order
- The AA charge will be linked to an individual’s marginal tax rate.
- Consultation continues on possible ways of collecting annual allowance tax charges (AATC), after the AA reduces to £50,000 in tax year 2011/2012. Proposals include:
- Individuals settling the AATC up to an initial threshold of up to £2,000 to £6,000 from current income.
- Allowing individuals to settle amount of AATC above this initial threshold by authorising their pension scheme to deduct it from benefits and pay it to HM Revenue and Customs (HMRC) on their behalf. Two methods of ‘scheme pays’ option have been proposed for consultation, either allowing the AATC to be settled by immediate deduction from benefits accrued or defer AATC to the date benefits are paid.
- An individual only needs to be a member of a registered UK pension scheme to potentially utilise carry forward rules.
- Carry forward can be used by members of registered or currently relieved non-UK pension schemes in years which they were a member of a scheme, irrespective of if they were UK resident in those tax years.
- Pension benefits are exempt from the AA test where they are taken in the form of a serious ill health lump or due to ill health for an individual who is ‘never likely to be in future gainful employment’. It should be noted this is not the same definition as for ‘ill health retirement’.
- Anti-avoidance regulations have been expanded to prevent use of ‘post-entitlement arrangements’ in relation to scheme pensions to avoid AA charges.
2. Reduction in lifetime allowance (LTA)
June’s emergency Budget saw the new Government considering the possibility of restricting pension tax relief by reducing not only the AA from 6 April 2011 but also the LTA from 6 April 2012.
Following a period of consultation, the Government made decisions on the key points regarding the AA but has only now released detailed decisions regarding the reduction in the LTA.
Key decisions
- Confirmed that LTA will reduce from £1.8m to £1.5m from 6 April 2012.
- Potential LTA increases in future tax years will be subject to Treasury Order.
- An ‘underpinned LTA’ of £1.8m is proposed to maintain the transitional protection offered by primary, enhanced and scheme specific tax-free cash protection.
- A new type of transitional protection, known as ‘fixed protection’, is proposed to protect those who were planning based on the £1.8m LTA.
- Those who nominate for ‘fixed protection’ will have to submit nominations to HMRC in a prescribed format by 6 April 2012 and then cease all future pension contributions or ‘relevant benefit accrual’ (RBA) by that date.
- Fixed protection can be lost in much the same way as enhanced protection on accrual of pension benefits/contributions that are not RBA, if an impermissible transfer takes place, or a new arrangement is made other than in permissible circumstances.
- The trivial commutation lump sum and winding up lump sum limits will be de-linked from the LTA and be maintained at the current level of £18,000. They will potentially be increased subject to Treasury Order in future tax years.
- If a registered pension scheme member dies before 6 April 2012 giving rise to a benefit crystallisation event after 6 April 2012 then an LTA of £1.8m will be used in the associated LTA test.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the December 2010 Autumn tax updates which may change before becoming law.