2011/12 tax year - Changes to pension rules
The following changes to pension regulations took effect from 6 April 2011. There are some changes which make Self Invested Personal Pensions (SIPPs) significantly more attractive than previously. However, there are areas where the advantages of pensions in general are being pruned back.
New benefits
- Allowances you do not use will be carried forward
You can now make use of any unused annual allowances from the last three tax years. You can contribute up to £50,000 (the new annual allowance). In addition you may be able to contribute (and receive tax relief on) a higher amount, by taking into account any unused allowances you have from the three previous tax years. For example, when assessing your annual allowance for 2011/12 you can also look back to any unused allowances in the 2008/09, 2009/10 and 2010/11 tax years (using a notional annual allowance of £50,000 for these tax years).
To qualify:
- You must have been a member of a Registered Pension Scheme in the relevant tax year
- Part of your annual allowance (£50,000 pa) must remain after deducting the contributions you did make that year (in what is called the “pension input period”)
- You must have sufficient relevant UK earnings in the tax year that the contribution is paid in order to receive tax relief on the contribution.
This is good news if you have contributed less than £50,000 each year for the last three tax years. This could be because you are a high earner and have been restricted in the contributions you were able to make, or you may have had an irregular income. The tax relief you receive relates to your earnings in the tax year that the contributions are made.
You must first of all use your current year annual allowance before using the carry forward rules. When this is exhausted you then use the earliest year’s unused allowance within the three year period before later years.
Here are some examples of how carry forward works:
Example 1 Contributions £20,000 carry forward available in 2011/12 2008/09 £70,000 The 2008/09 contribution exceeds the notional annual allowance so no carry forward is available, but there is scope in the two subsequent years to carry forward. 2009/10 £40,000 2010/11 £40,000 Example 2 Contributions £0 carry forward available in 2011/12 2008/09 £40,000 There is scope for carry forward in the 2008/09 and 2009/10 tax years but the contribution in 10/11 exceeded the notional annual allowance and so wipes out any carry forward. 2009/10 £10,000 2010/11 £100,000 Example 3 Contributions £30,000 carry forward available in 2011/12 2008/09 £30,000 2009/10 pension input amount exceeds the deemed annual allowance by £50,000 and so uses up all of the carry forward potential from the earlier tax year. However, this individual can still carry forward in respect of the 2010/11 tax year. This is because the large contribution from 2009/10 only uses up carry forward from earlier tax years, not later ones. 2009/10 £100,000 2010/11 £20,000
- Flexible Drawdown
If you have an annual income of £20,000 or more from company pension schemes, state pensions and lifetime annuities, you now have more flexibility around how much you can withdraw from a SIPP or personal pension. Effectively, the cap on annual withdrawals (that was linked to the Government Actuarial Department tables) has been removed.
SIPPs are far more flexible as a result. They now allow investors to supplement their retirement income by taking lump sums from their personal pension pot. Although, where the lump sums do not represent the 25% tax free amount available when pension benefits are first drawn, these amounts will be subject to income tax.
- Use a SIPP or personal pension in your inheritance planning
You are no longer obliged to start taking an income at age 75. When you also consider that the reduction in the rate of tax (from 82% to 55%) which could apply to your remaining pension pot if you decide to pass it on to the next generation on your death, SIPPs are now an increasingly attractive inheritance planning tool - particularly for 50% tax payers. Lower rates of tax may even apply, depending on your circumstances.
New restrictions
- The annual allowance is lower
the annual limit on contributions eligible for tax relief falls from £255,000 to £50,000. The maximum that you can contribute to your pension (on which you can obtain tax relief) is either 100% of your income or £50,000, whichever is less. Non- earners can also benefit from tax relief on contributions of up to £3,600. Those earning more than £130,000 pa have been restricted in their contributions over recent tax years. Therefore, this change will actually increase the amount that some high earners can contribute. The new carry forward rules mean that high earners may also top up their pensions using any unused annual allowances from the last three tax years.
- Drawdown pension replaces Unsecured Pension and Alternatively Secured Pension
The amount of income that you can withdraw from your pension where Flexible Drawdown is not permitted, will now be capped at 100% of the Government Actuarial Department (GAD) rates. The amount that can be withdrawn as income is based on your age and the lower cap will come into effect on the first review of your SIPP after 6 April 2011. This could potentially mean that you can withdraw less from your SIPP on an annual basis.
- Tax on excess contributions
If your contributions exceed the permitted level (£50,000), the excess amount is subject to tax at your highest tax rate.
- Removal of annual allowance exemption
There have been certain situations in the past where the annual allowance did not apply to contributions. For example, this could be the year in which you first withdrew your pension benefits. This could mean that you were able to top up your retirement savings above the levels normally permitted. These exemptions have now been withdrawn, with certain exceptions in the case of death/ serious ill health.
- Reduction in the lifetime allowance
The total value of all pension schemes that an individual holds is currently restricted to £1.8m. This will reduce to £1.5m from April 2012. If you currently have more than £1.5m in your pension pot, you can apply to HMRC for Fixed Protection on your pension fund. You may also be able to protect your pension pot if it is under £1.5m and you expect investment returns to take it beyond this level. Fixed Protection will protect you from tax charges on the excess amount over £1.5m up to £1.8m, but there are conditions which apply. Crucially this will mean that you cannot make any further pension contributions after the 2011/12 tax year.
However, those holding Fixed Protection will be permitted to open new pension schemes in respect of existing savings without impacting the protection. For example, a SIPP can be used to transfer existing pension funds, provided that no new contributions are made.
In addition, the following change to regulation has already been announced to come into effect from 6 April 2012.
Summary
Whilst it is disappointing that the annual allowance will fall to £50,000, the simplification of the limits is welcome. You can obtain tax relief on contributions of £50,000 or 100% of your income, whichever is less. Non-earners can also receive tax relief on contributions of up to £3,600.
Flexible Drawdown and the carry forward of allowances provide further flexibility for SIPPs and personal pensions, making them an even more attractive option for those who want to make their own investment choices.
Barclays Stockborkers does not provide tax advice. If you feel you need advice you should seek a suitably qualified adviser. The impact of tax and the value of reliefs and other favourable treatment can vary depending upon your circumstances. Tax rules can change.
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