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Alistair Blyth: Changes that could affect your pension contributions

WITH effect from April 6, 2011, the annual allowance for pension contributions was reduced from £255,000 per annum, to £50,000 per annum. Individual contributions are capped at 100 per cent of net relevant earnings, or £3,600 if greater.

Although not every one can afford the maximum allowance of 100 per cent of earnings, an additional lump sum contribution can not only be used to eradicate your exposure to higher rate tax on your income, it can also negate the need to pay additional marginal tax on bank interest or dividend income. Employer contribution is not capped at 100 per cent of earnings, but the overall annual allowance of £50,000 still applies.

Where contributions are going to exceed the new £50,000 allowance, an individual may be able to carry forward unused relief from the previous three tax years. However, you must have been a member of a Registered Pension Scheme (personal or occupational) prior to April 6, 2011. For members of a defined benefit (e.g. final salary) occupational scheme, the calculations are more complex as it is the deemed value of the increase in pension benefits over the scheme’s Pension Input Period that is tested against the annual allowance (and also when calculating any potential carry forward relief). So if you or your employer are considering making substantial payments to your pension(s) before April 5, 2012, please seek professional advice to ensure that you don’t fall foul of the new annual allowance rules.

In addition, the overall Lifetime Allowance is reducing from £1.8m to £1.5m with effect from April 6, 2012. If the value of your accumulated benefits exceeds £1.5m (or may be likely to in the future) you can apply to HMRC for fixed protection. This will then allow you to retain the current lifetime allowance of £1.8m instead. This must be applied for by April 5, 2012 at the latest. Strict criteria apply once fixed protection has been granted, an important point is that no further pension contributions can be made by the individual, their employer or any other third party, ever again, or fixed protection will be lost.

For personal pension plan holders or members of defined contribution occupational schemes, this simply means that all pension contributions must cease. For members of defined benefit occupational schemes, this means that you must leave pensionable service, (i.e. stop accruing further pensionable service within the scheme) but you can still carry on working. Stopping pension contributions or leaving pensionable service may have a “knock on” effect on entitlements such as death-in-service benefits and spouse’s and dependants’ pensions. Seek professional advice if considering fixed protection.

The ISA allowance for 2011/12 is £10,680 per person. Contributions can be split between a Stocks and Shares ISA, and a Cash ISA, with a maximum Cash ISA contribution of £5,340. For those investors nervous of “market timing” when making a lump sum contribution into a Stocks and Shares ISA, some providers offer a facility to make the lump sum contribution now (so you don’t need to lose any of this year’s allowance) and then drip feed the contribution into the markets over a number of months, thereby spreading the potential volatility risk over a wider time frame.

This information is based on our understanding of current pension and tax legislation, which may change in the future. The value of investments can fall as well as rise, and you may not get back the value of your original investment.

• Alistair Blyth is an IFA with AB Financial Planning

 

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