Tax for exceeding annual allowance must be paid immediately

The Treasury says people exceeding the annual allowance (AA) on pension savings must meet their tax charges as soon as they arise.

People who incur AA charges above £2,000 will be able to choose to pay the full cost from their pension benefit, and the tax must be paid at the point the charge arises.

"Schemes will be required to operate this facility only where an individual has exceeded the AA outright within that scheme in the relevant year," a Treasury statement says.

Schemes have "full flexibility" in how they implement the system of payment, but must ensure it is fair to all scheme members.

In October 2010 the Treasury announced in April this year the AA will fall from £255,000 to £50,000 and the lifetime allowance (LTA) will fall from £1.8m to £1.5m. This, it claims, will generate £4bn in annual revenue.

Treasury secretary Mark Hoban says the reduction in the annual allowance (AA) from £255,000 to £50,000 is a "tough but fair" reform that will help tackle the deficit.

He adds: "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit, but not hit those on low and moderate incomes.

"The government believes that our system is fair, will preserve incentives to save and will help UK businesses to attract and retain talent."

Mike Smedley, pensions partner at KPMG, says: "This announcement is bad news for pension schemes but good news for members.

"The burden has very clearly been put on the pensions industry and individual pension schemes both paying the tax and also working out how exactly to reduce members' benefits as a result.

"With no ability to recoup any administration costs from members, undoubtedly this will increase the costs of running defined benefit schemes."