Pensions – ‘simplification’ at last?

Over the years we have repeatedly been promised simplification measures to enable us all to plan our retirement with some degree of certainty.

The pensions maze

The backdrop to the pension changes in 2006, - ‘A Day’ - was a promise of a ‘simplified’ pensions arena. However, by the time ‘A Day’ dawned, Government paranoia of tax avoidance had ensured a regime that was anything but simple. Whatever residual claims to simplicity may have been made, they were entirely banished with the 2008 rule changes that sought to limit tax relief for pension contributions to basic rate for high earners. The introduction of these rules followed by repeated changes is perhaps one of the finest examples of the dangers of legislative policy being made ‘on the hoof’.

Clear blue water

The coalition government made early promises that simplicity would be delivered and indeed on 14 October 2010, the announcement was made that
various changes to the pension regime would be made with effect from 6 April 2011.

Key features included:

  • The absurdly complex rules restricting the rate of relief for pension contributions would be withdrawn, allowing tax relief at your highest rate of tax.
  • The Annual Allowance (AA) was reduced from £255,000 to just £50,000, with the capacity to carry forward unused relief from up to the previous three
    years, potentially allowing a lump sum contribution of £200,000 (gross).
  • The Lifetime Allowance will be reduced from April 2012 to £1.5m (with
    transitional protection).
  • Significant changes regarding the annuity purchase at age 75 creating considerably greater flexibility.

Many professionals will have taken the view that the Lifetime Allowance restriction is unwelcome but nevertheless, the capacity to make pension
contributions of up to £50,000pa brought pension planning back onto the agenda. The Government’s pledge of bringing stability to the taxation system
combined with the capacity to carry forward unused pension relief, certainly gives room for the view that there was no need for action.

Back to the future?

Any confidence should have been dispelled by recent press coverage. It would appear that tax relief for pension contributions has again become a matter of scrutiny: limiting the relief for pension contributions for 40%
and 50% taxpayers would earn the Treasury some £7bn pa and the scrapping of all tax relief would save £22bn pa.

Whilst the Treasury has pledged that the 2011 Budget represented the Government’s intent and that there are no other plans afoot, any sanguinity regarding pension provision may carry with it a significant cost in lost tax relief for professionals.

Due to the complexity of the pensions regime we would recommend that legal
professionals seek further information from your local office.

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