Cash Clinic: Get up to speed on the new rules over pension savings

Question: I GATHER there has been yet another change in pension rules, with the introduction of a new Finance Bill. I am a 40 per cent taxpayer and try to contribute as much as I can towards my pension. Are there any changes that could affect that? TM Newburgh

Answer: THE changes introduced by the new Finance Bill are far-reaching, amending not only the amount you can contribute into your pension but also the maximum tax-efficient amount that your pension fund can be worth when you retire. There are also new rules over the way private pension funds can be used to provide income in retirement. The main change is the removal of the effective compulsion to purchase an annuity.

Until April 2006, personal pension contributions were based on a percentage of earnings, tiered depending on age. After this point, pension savers were allowed to contribute up to 100 per cent of their earnings up to an annual allowance of 215,000, which was due to rise to 255,000 in the 2010-11 tax year. However, to curb the amount of tax relief the government was forking out, the limit was short-lived and in April 2009 restricted contributions of 20,000 were introduced for those earning more than 130,000 a year.

The dawn of a new tax year this April saw change again with all previous allowances scrapped and a new standard annual contribution allowance for all pension savers of 50,000. This has been welcomed by higher earners, who can benefit from up to 50 per cent tax relief on their pension contributions. Who would have thought that a government curbing its spending would give away tax relief of 25,000 on a 50,000 pension contribution?

The new contribution limit extends beyond this 50,000 annual allowance with the re-introduction of "carry forward", a facility that was available for decades until its withdrawal in January 2002.

Pension savers are now able to carry forward three years' worth of unused annual allowances, at 50,000 a year. This means you could pay up to a whopping 250,000 during the course of a tax year (taking into account pension input periods) into your pension fund and receive full tax relief on the contribution - 125,000 tax relief for some individuals.

This is all well and good, but the government has also decided to change the maximum amount that you are able to hold tax efficiently within your pension fund - the lifetime allowance.

The new allowance of 1.5 million, which comes into effect on 6 April, 2012, has been reduced from the current 1.8m. There are protection arrangements available if you have pension pots above these levels and also if you expect your existing funds to breach this barrier.

However, with "primary", "enhanced" and now "fixed protection" available, it is more essential than ever that you seek professional advice.

It is also worth noting that if you don't have the appropriate protection in place and then breach the lifetime allowance level, you could face a significant tax charge when you come to take your pension benefits.

• Jason Hemmings is a wealth manager at Cornerstone Asset Management, part of HBJ Gateley.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd, Cornerstone Asset Management LLP and HBJ Gateley accept no liability on the basis of this article.