Government provides further details on changes to pensions tax relief

The government has announced how the facility for meeting high annual allowance charges from pensions benefits will work in practice.

Mark Hoban, financial secretary to the Treasury announced that schemes will have a considerable amount of time to complete the payment process with additional flexibility being given during the first year.

Employees with annual allowance charges above £2,000 will be able to elect for the full liability to be met from their pension benefit. Schemes will be required to operate this facility only where an individual has exceeded the annual allowance outright within that scheme in the relevant year. 

While the government has given schemes flexibility in how they operate, it has been made clear that any adjustment to an individual’s pension benefit should be fair to all scheme members.

The government expects most individuals and employers to adapt their pension saving behaviour to avoid incurring a charge by exceeding the annual allowance, and will carry forward unused allowances.

However, recognising that, in some circumstances, individuals could still see high charges reflecting significant uplift in pension value in a given year, the government consulted on options to enable individuals to meet these charges from their pension benefits.

As announced in October 2010, from April 2011 the annual allowance (AA) for tax-privileged pension saving will be reduced from £255,000 to £50,000 and from April 2012 the lifetime allowance will be reduced from £1.8 million to £1.5 million.

Hoban said: “The government believes that our system is fair, will preserve incentives to save and – compared to the last government’s approach – will help UK businesses to attract and retain talent.”

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