Finance Bill becomes law: Know your pension rules

The Finance Bill 2011 became law on Wednesday, but many of the big pension tax relief changes have been in place for two months already. IFAOnline's panel of experts reviews their impact.

Annual Allowance

The Act cuts the annual allowance (AA) on tax free contributions from £225,000 to £50,000, effective from April 2011.

Contributions exceeding the limit will be taxed at individuals' marginal rates.

Claire Carey, partner at law firm Sackers, gave two main methods to protect clients from AA tax charges:

• Make use of new carry forward provisions by spreading one-off spikes in accrual over unused allowance in the last three tax years
• Where employees look likely to exceed the AA on a regular basis as a result of high earnings or long service, employers can "aim off" the AA by smoothing pensionable pay and accruals.

Bhargaw Buddhdev, partner at Barnett Waddingham, said clients who are likely to exceed the AA via their final salary scheme may be best off capping their accrual and taking extra salary instead.

"This may reduce the effective tax rate from 70% to 58% for someone who is currently a 50% tax payer and expects to be a 40% tax payer in retirement," said Buddhdev.

Carey said for clients who cannot avoid a tax charge for exceeding allowances, there may be the option to pay the charge from their pension savings instead of stumping up the cash.

Lifetime Allowance

The Act brings in a new lifetime allowance (LTA) of £1.5m rather than £1.8m, effective from 6 April.

It also introduces a new protection regime for people who have already exceeded the new LTA.

"Pension savers will be able to apply for ‘fixed protection' by 5 April 2012, enabling them to keep an LTA of £1.8m," Carey said.

However, Carey said fixed protection is only available to investors who do not already have the old forms of primary or enhanced protection.

She warned fixed protection will bar people from paying in any more to defined contribution (DC) pensions.

What about flexible drawdown?

The Act officially introduces capped and flexible drawdown to the pensions landscape.

However Mary Stewart, director at SIPP provider Hornbuckle Mitchell, said these decummulation methods are still not set in stone.

Whilst some providers, such as Rowanmoor, have been offering flexible drawdown since 6 April, others are still holding back in case of later changes from HMRC.

"We are still waiting for follow-on regulations which should be laid next month," said Mitchell.

"These should clarify outstanding issues such as the treatment of flexible and inflation-linked annuities in regard to the Minimum Income Requirement."