Following today's announcement from the Treasury that the
annual pensions allowance will be cut from its current level of £255k to
£50,000 and the lifetime allowance will drop from £1.8 million to £1.5
million, Chartered Financial Planner Paul Jones gives his thoughts.
This move by the Treasury is a further step towards simplifying pensions and this point alone has to be welcomed.
The
Treasury have broken the link between earnings and the amount of tax
relief available on contributions and for some high earners, this is
good move. They will now be in a position to obtain full tax relief on
contributions up to £50k per annum - more generous than the current
rules allow.
For other high earners, albeit consistently earning
below £130k per annum, the move culls their, or their company's if self
employed, potential annual pension contributions (earning tax relief) by
£205,000.
There are negatives which run deeper than the initial
headline of the cuts being made. Some clients with substantial pension
funds, who were unable to protect themselves against potential lifetime
allowance tax charges prior to pension legislative changes in April
2006, have been attempting, with advice, to manage the value of their
funds with a view to keeping within the (current) £1.8 million lifetime
allowance limit. Reducing this allowance down to £1.5 million, albeit
with effect from April 2012, represents a goalpost being moved and may
result in additional people now incurring a lifetime allowance pension
tax charge in due course.
Inevitably the proposal to put an
annual limit on pension contributions serves to work against
entrepreneurs and business owners who might otherwise have contributed
large sums into pensions just prior to retirement, perhaps from the sale
proceeds of their business. This negative remains, though it has been
softened a little by the facility to increase contributions, above the
annual limit, to make up for any unused allowance over a three year
window.