HSBC warns wealthy to review tax effect on pensions

Tax changes aimed at the wealthy in the UK and due to take effect from April 6, 2011 are likely to make a significant impact on pension provision.

Individuals with high levels of earned and unearned income need to plan ahead of a "tax onslaught" on the well-off, warns HSBC Private Bank.

Patrick Power, associate director, Financial Planning in HSBC Private Bank (UK) Specialist Tax Group, says: "The proposed new rules add yet another layer of complication to pension funding and the need for advice has never been greater."

The government has also introduced anti-forestalling measures to ensure compliance.

"We believe higher income individuals should at the very least make use of the special annual allowance, much in the same way that they should fund their annual ISA allowance and manage their capital gains tax allowance," says Power. "Making pension contributions above the special annual allowance should not be ruled out."

Those with relevant income of more than £180,000 a year will lose all higher rate income tax relief on pension contributions and those with relevant income between £150,000 and £180,000 will lose 1% relief for every £1,000 of such income above £150,000. These taxpayers currently receive 40% tax relief on pension contributions compared with the standard rate of 20%.

The term 'Relevant income' includes unearned income such as dividends and interest, as well as earned income. For those with relevant incomes of £130,000 or more, the Pre Budget Report of 9 December 2009 has further added the value of employer pension contributions to the 'relevant income' calculation.

To prevent higher income earners from boosting contributions before the new rules come into effect, the Government has introduced rules limiting higher rate tax relief to those with relevant income over £130,000 in the current or last two tax years to a special annual allowance of between £20,000 and £30,000 depending on historic contribution payment levels.

There is a general perception among higher income clients that without the incentive of higher rate tax relief, the remaining features of pension plans are not particularly attractive when compared with certain other investment schemes and structures.

"The result is likely to be a more limited use of pension schemes than in the past, together with a portfolio of other more flexible investment schemes and structures such as collective investment schemes and qualifying and unqualifying life policies," says Power.