New government restrictions on high-value pensions

The government is targeting those with high value pensions from 6^th April 2012. Firstly, it will penalise those with pension savings valued at more than £1.5 million at retirement.  They will face a Lifetime Allowance (LTA) charge of 20% of anything over this amount. This does not only affect those who have saved more than £1.5 million, but also those with final salary pensions whose entitlement is worth more than this amount (ie senior public sector employees such as army officers, university lecturers and GPs).

Secondly, the government is limiting to £50,000 a year how much one can save into a pension. By most people’s reckoning it is difficult to put aside £50,000 into a pension, but it will affect more people than previously thought. If one’s pension entitlement rises by £3,125 a year (inflation adjusted), then by the Government’s calculation this is an annual pension contribution of £50,000. The government capitalises the entitlement by a factor of 16, and £3,125 by 16 is £50,000.  Any excess over £50,000 is charged to the member at their highest rate of tax.  For example, if the pension contribution is deemed to be £60,000 for a higher rate tax payer, then the tax charge is 40% of the excess over £50,000, ie £4,000.  There is a three year annual allowance carry forward rule, and ongoing arguments as to who should pay this tax, the employer or the employee. We recommend that if you are concerned you speak initially to your pension scheme administrators.

At the other end of the scale the government is encouraging pension saving through the work-place pension saving reforms which we have previously covered.  Whilst the government’s efforts to encourage mass retirement saving is commendable, it is restricting the top end of the scale which is causing complications that are not completely appreciated by those potentially affected.

Disclaimer: This article is for general information only. Do not act on its contents without seeking professional advice tailored to your particular circumstances.