Finance Bill 2011: Pensions annual allowance will be reduced

Legislation will be introduced in the Finance Bill 2011 to restrict pensions tax relief by reducing the annual allowance (AA) from £255,000 to £50,000 and the lifetime allowance from £1.8 million to £1.5 million.

The changes to annual allowance will be fully enforced in the tax year 2011-12, where as the reduced lifetime allowance will have effect from 6 April 2012.

The overall number of pension savers who would potentially be affected by the reduced AA is estimated to be around 100,000, around 80% of whom have incomes over £100,000. For the remaining 20% with incomes below £100,000, who carry forward unused allowances may be able to reduce or eliminate the charge.

Nicola Plant, partner at Thomas Eggar, said: “Maximum contributions into an approved pension could still produce an annual income in retirement for an individual of around £50,000. This is still far more than the majority of the working population could expect to receive if they are to make affordable contributions from their salary during their working lives. However, it is little comfort to those high earners who have been used to larger salaries and a commensurate pension.

“If, however, everyone makes use of the allowances available to them, in so far as they are able, then it will provide a safety net, making individuals less reliant on the State for support in their old age.”

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