Pension issues arising in this year's Budget
The 2009 Budget was unveiled by the Chancellor on 22 April 2009.
Despite widespread pre-Budget fears that higher-rate tax relief on pension contributions would be withdrawn altogether, the actual changes announced will have far less impact upon higher-rate income tax payers, although adds even more unwelcome complexity into what was initially designed to be a simplified pension taxation system!
Restriction of tax relief on pension contributions
The Chancellor announced changes to the tax relief available on pension savings, for individuals whose income is £150,000 or higher.
The Government intends, from 6 April 2011, to restrict tax relief for individuals with an annual income of £150,000 or more.
Relief will be tapered away, so that for those earning over £180,000 relief will be worth 20 per cent, the same as to a basic rate taxpayer.
In anticipation of that new restriction, the Government is introducing new rules - which apply from 22 April 2009 - to restrict higher rate tax relief on both personal and employer pension contributions.
The restrictions will apply to people;
· whose income is £150,000 or higher in any of the tax years from and including 2007/08 onwards (not just the current and future tax years);
· who change their normal ongoing regular pension savings (including entering into a salary sacrifice arrangement); and
· whose non-regular additional pension savings result in total contributions exceeding £20,000 in the tax year.
The Government's stated aim is to remove the advantage to those individuals of increasing their pension contributions in excess of their normal annual pattern before April 2011 (a measure which they have entitled "anti-forestalling").
Are you likely to be affected by these changes?
It is believed the vast majority of people will not be affected by these changes.
Standard Life estimate that about 8 per cent of those paying higher rate tax will be affected; that is, around 291,000 people. (Source; Financial Times - 23 April 2009)
The changes will NOT apply to you if your total annual income is, or has been, less than £150,000 in each of the tax years from 2007/08 onwards.
The changes will NOT apply to you even if your total annual income was £150,000 or more - provided that you continue as normal with your existing regular pension savings (which includes any employer contributions) and do not increase your pension savings, on or after 22 April 2009.
The changes will NOT apply to you if your total annual income was £150,000 or more, and you do increase your pension contributions - provided that your overall annual contributions are less than £20,000.
The Government has said that it will consult widely on how this will be implemented.
This is welcome, as queries and issues are already being raised amongst pensions practitioners (for example, how many years are needed to establish a pattern of regular pension contributions?)
Another key issue will be determining the most appropriate method of valuing pension benefits under defined benefit schemes for those with incomes of over £150,000.
Trustees of such schemes will be concerned about the additional administrative requirements which may fall on them, as a result of this measure.
Other pensions-related issues include;
· the Basic State Pension will increase this year by at least 2.5 per cent, even though RPI is expected to be negative in September 2009;
· the "capital disregard" which is used to calculate an individual’s Pension Credit entitlement will increase from £6,000 to £10,000 in November 2009;
· the Budget confirmed the Government’s plans (which were announced in the pre-budget report in November 2008) to freeze the lifetime allowance (at £1.8million) and the annual allowance (at £255,000) from 2011/12 for five tax years; and
· the Government announced plans to introduce minor changes to the pensions tax system in the Finance Bill 2009, including the power to provide for payments from the Financial Assistance Scheme and the Financial Services Compensation Scheme to receive equivalent tax treatment as if they had been received from the original pension scheme or insurer.
How can Pearson Jones be of help to you?
There are so many inconsistencies and unintended consequences arising from the draft legislation, that we envisage amendments will be made, prior to the Finance Bill 2009 receiving Royal Assent.
These amendments could either be favourable, or could alter things negatively.
However, we believe that the vast majority of higher rate taxpayers will still be able to contribute to their pension and obtain higher rate tax relief on that contribution.
Additionally, given that the Budget reveals that higher rate tax relief for pensions is obviously 'under attack', it would appear sensible to contribute as much as you can to your pension whilst higher rate tax relief is still available, subject to the £20,000 'special annual allowance' limit.
In conclusion, regardless of whether your 'relevant income' is less than £150,000, or greater than £150,000, please speak to Pearson Jones, as your existing pension funding strategy may need to be altered.
James D Jones-Tinsley
Pensions Technical Manager
Pearson Jones plc
(Sources: All sources are taken from this year's Budget Notes and Press releases, unless stated otherwise).
Information based on our understanding of the Budget Report 2009 and is subject to change, prior to becoming legislation.
Individuals should seek advice from an Independent Financial Adviser, before taking any action.