Profit from pension changes Lifetime allowances

Millions of people saving for retirement faced dramatic changes to the rules governing pensions from April and next, so what are the consequences for pension savers?

A radical reduction in the annual and lifetime allowances for contributions, as well as the abolition of the requirement for pension savers to buy annuities by the age of 75, will affect many pension savers. Most importantly, they could penalise many on middle incomes and those who are in generous final salary schemes, by triggering large tax bills.

From April 6, the annual allowance for pension contributions fell from a maximum of £255,000 to £50,000. Also, the antiforestalling rules introduced by the previous Government restricted those earning more than £130,000 a year to an annual contribution of £20,000, also came to an end.

If you exceed this new allowance, you will have to pay tax on the excess at your highest marginal rate. If the bill is more than £2,000, you will be able to opt to have the whole amount paid by your workplace pension scheme, but sacrifice benefits later. For members in schemes, this is good news, as it means the bill is paid from gross rather than net income, avoiding double taxation.

If you exceed your allowance in one year, you are able to offset any unused allowance from up to three previous years, back to the 2008-09 tax year. This would be particularly useful for those who have been caught out by the anti-forestalling rules.

If you were only allowed to pay in £20,000 to your pension last year, you can immediately add the extra £30,000 to next year’s allowance, giving you £80,000 for 2011-12. If you did not make contributions in 2008-09 and 2009-10, you can make this up in 2011-12.

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