Pensions: New limits on what you put away: it's time to act

• For those lucky enough to be able to pay vast sums into their pension pots each year, the tax breaks are about to be cut drastically Picture: /Getty Images

From 6 April the amount that savers can put tax-free into a pension each year will be slashed from 255,000 to 50,000, a move that some experts predict will cause chaos.

A year later the lifetime allowance will drop from 1.8 million to 1.5m, with no plans to increase it in line with inflation for the first four years.

David Gow, a financial planner at Acumen Financial Planning in Edinburgh, said: "The government has been tinkering with pensions legislation for years. A mere five years after A-Day - so-called pensions simplification - the rules are changing again. Those looking to boost their retirement income should sit up and take note."

High earners with pension pots of roughly 1m and above are already being urged to seek advice about the lifetime limit. But the immediate issue is the new annual allowance rules, a change that will present both opportunities and risks for high earners.

The vast majority set to be affected by the lower threshold earn more than 100,000 a year, according to the Treasury. However, the reduced limit could also affect those making irregular contributions, perhaps when a lump sum (such as the proceeds of a business or property sale) is paid into the pension pot.

If you're planning a single payment of more than 50,000 into your pension, do it before April or seek advice.

The opportunity

Since 2009 the annual contribution limit for people earning over 130,000 a year and who have a history of making irregular contributions has been limited to 20,000.

Their contribution limit will rise to 50,000 from 6 April, in line with the new allowance. And from April they will be able to take advantage of a new "carry-forward" opportunity, allowing unused allowances from the past three years to be added to the 50,000 allowance for the 2011-12 tax year.

This could particularly help those who have seen their recent contributions driven down by the 2009 forestalling rules.

Gow explained: "Say you've only been able to pay in 20,000 in each of the past two years. Under the new regime, you will be deemed to have unused allowances of 30,000 in both those years - meaning you could contribute 60,000, plus 50,000 for the 2011-12 tax year, giving a total potential contribution of 110,000."

Gow believes savers who have been discouraged from making pension contributions in recent years could be persuaded otherwise by the new rules.

"You could be able to stash a whopping 250,000, with full tax relief, into your pension in the course of a tax year. This would comprise 50,000 (the annual allowance for 2011-12) plus 150,000 (carry forward of unused allowance from previous three years) plus 50,000, which is the annual allowance for 2012-13," he explained.

However, Gow warned that opportunities to pile cash into pensions and benefit from tax relief should not be taken for granted, given problematic state finances.

Gow said: "Who knows how long it will be before the government changes the rules again? This is a huge opportunity for people to maximise their pension pot and grab extra tax relief - while they can."

The carry-forward window is open to all savers, not just those who have been restricted to contributions of 20,000 a year.

Tom Munro, of Tom Munro Financial Solutions, said the new rules provide those who have missed contributions in recent years with a chance to significantly boost their pension funds. He added: "If contributions are likely to be higher than the 50,000 limit, simply use the 'carry forward' facility after 6 April that allows you to 'mop up' unused relief for up to three years."

The threat

One potentially costly problem expected to rear its head for some high earners is the impact on their pension input period (Pip).

This is the period over which pension contributions are measured and is typically a year, the maximum length. Every pension saver has their own Pip, but with the annual allowance set until now at 255,000, it has very rarely been relevant because even the biggest contributions over the Pip have fallen below the limit.

Savers who pay more than 50,000 during their Pip will need to find out more about their period, because they could face a hefty annual allowance tax charge in line with their income tax level.

A big part of the problem is that many pension schemes have Pips that are not aligned with the tax year. So schemes with a Pip ending on or before 5 April this year are covered by the 255,000 allowance for the entire period.

But those that straddle the tax year (e.g. run from 1 May to 31 April) are covered by the new regime, meaning savers with contributions in that period of more than 50,000 could be caught out.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said the govern- ment should have scrapped Pips when it changed the annual allowance.

"The problem with Pips is not so much that they will catch out those pension investors with above-average pension accrual, resulting in unexpected tax charges (though they will).

"The main problem with Pips is that with the new lower annual allowance, pension planning, investing, selling, managing and transferring will all be more complicated - unnecessarily complicated."

• From 6 April there will be a 50,000 cap on the pension contributions you can make each year, down from the current level of 255,000.

• The lifetime allowance governing the amount that can be saved into a pension drops from 1.8m to 1.5m in April 2012.

• Unused annual allowances from the last three years can be carried forward and added to the new annual allowance after 6 April

• Savers contributing more than 50,000 a year into their pension need to find out when their pension input period (Pip) falls.