For 2011/12 only, individuals are able to carry forward any unused Annual Allowance from the three previous tax years, whilst still obtaining tax relief at the highest marginal rate. There is still time to "top up" your pension, but the window will soon be closed!
Overview
The rules governing contributions to pension schemes changed significantly from 6 April 2011.
These changes have impacted all high earning and/or contributing individuals to a greater or lesser extent meaning that they will need to review their existing arrangements. The reduction in the Annual Allowance will inevitably mean that a number of people will have reduced contributions and redirected these to non-pension investments.
Summary of Changes
As with any pension changes, there is a lot of detail, but the changes can be summarised as follows:
Contributions:
• The Annual Allowance is £50,000 from 6 April 2011.
• Tax relief will be at the member’s marginal rate (ie up to 50%).
• The ‘final year’ rule will be removed.
• There is a provision to carry forward any unused Annual Allowance for up to three years.
• There is a flat factor of 16 for determining the deemed contribution to Defined Benefit (DB) schemes.
• Accrued rights for active members will be revalued in line with CPI, which will lead to slightly lower deemed contribution levels.
• Increases in deferred DB pensions will not be tested against the Annual Allowance.
Benefits:
• The Lifetime Allowance will reduce to £1.5 million from 6 April 2012.
• Individuals who have been granted Enhanced and/or Primary Protection will retain it.
• Primary Protection Factors are likely to be based on £1.8 million rather than the reduced Lifetime Allowance.
• Individuals who have already made contributions with a view to targeting benefits between £1.5 million and £1.8 million have been granted the ability to protect these rights.
• The Triviality limit has been set at £18,000 (rather than 1% of the reduced Lifetime Allowance).
Carry Forward of unused Annual Allowance:
The Government has recognised that one of the features of its original proposals was that members of DB Schemes with moderate incomes could be caught by the reduced Annual Allowance if they periodically experienced above average increases in pensionable salary. As a result, the Government has decided that individuals will be able to carry forward any unused Annual Allowance from the three previous tax years, which could then be offset against contributions above the Annual Allowance in a particular tax year. This measure has applied from 2011/12 and will also apply to members of DC Schemes.
There will be a strict order in which the Annual Allowance is used up. The Annual Allowance for the year in which the contribution is paid (the current year) is used first, then the Annual Allowance from the earlier years, using the earliest year first.
For the purpose of the carry forward rules, the Annual Allowance for the tax years prior to 2011/12 is deemed to be £50,000.
For example:
Richard has relevant UK earnings of £300,000. In 2008/09, 2009/10 and 2010/11 he made contributions of £20,000. He wants to contribute an additional amount to pensions. The following table shows the amount he could pay in 2011/12 without breaching the Annual Allowance:
Tax Year Contribution Paid Deemed Annual Allowance Unused Allowance
2008/09 £20,000 £50,000 £30,000
2009/10 £20,000 £50,000 £30,000
2010/11 £20,000 £50,000 £30,000
£90,000
As a result, in 2011/12 he could make a contribution of £140,000 (£50,000 for 2011/12 + £90,000 unused allowance carried forward) on which he could receive 50% tax relief (£300,000 - £140,000 = £160,000; higher rate tax starts at £150,000).