Pensions

Simplified relief for higher earners
Ending the requirement to buy an annuity
Auto enrolment and NEST
Tax efficient alternatives to pension funding
Employer funded retirement benefit schemes (EFRBS)

Simplified relief for higher earners

From April 2011, the annual allowance for pension contributions will be substantially reduced from £255,000 to £50,000. This means that tax relief will only be available on the first £50,000 of pension contributions each year. This relief will be available at the individual's marginal rate of tax, so high-earners can still benefit from relief at 50%.

The lifetime limit for pension contributions (the value of the pension pot that an individual can build up and still benefit from the favourable tax treatment) will also be reduced from £1.8 million to £1.5 million from April 2012. Individuals approaching this new limit now should take advice on the options available to them, and the possible consequences of these, before making any further contributions.

The removal of the overly complex set of rules introduced by the previous Government can only be welcomed. However the reduction in the lifetime limit to £1.5 million could restrict the ability to buy an annuity which is sufficient to provide an adequate annual income on retirement. This may mean that other plans will have to be put in place if individuals want to maintain their standard of living upon retirement.

As for the new rules, they allow for any unused element of the £50,000 annual limit to be carried forward three years - this may present an opportunity in 2011/12 for individuals who have restricted their pension contributions in 2009/10 and 2010/11, following the introduction of the anti-forestalling provisions, to make some catch-up contributions and benefit from full tax relief on them.

Ending the requirement to buy an annuity

With effect from 6 April 2011, the Government will end the requirement to use a pension fund to buy an annuity. Details of the changes that will be included in the Finance Bill 2011 are as follows:

• The maximum income that an individual may withdraw from most drawdown pension funds will be reduced from 120% to 100% of the equivalent single-life annuity as set by the Government Actuaries Department (GAD)
• The minimum annual withdrawal amount ( for those aged over 75 only ), currently 55%, will be abolished
• The maximum annual withdrawal amount will be subject to review at least every three years until the member reaches 75, after which the amount will be reviewed annually
• Individuals with drawdown pensions who have a secure lifetime pension income of at least £20,000 a year, will be able to access the whole of their drawdown funds as pension income without limit, where the provider offers flexible drawdown

Transitional rules modifying how certain rules apply to pension scheme members who reach the age of 75 on or after 22 June 2010, the date of the Emergency Budget 2010, have already been enacted in the Finance (No. 2) Act 2010. Inheritance tax (IHT) charges that previously applied to pension scheme members aged 75 and over will also be relaxed from 6 April 2011. As a result, IHT will not typically apply to drawdown pension funds remaining under a registered pension scheme. In addition, the IHT anti-avoidance charges that currently apply where scheme members omit to take their retirement entitlements (eg a failure to buy an annuity) from a registered pension scheme, or Qualifying Non-UK Pension (QNUP), will also be removed.

Auto enrolment and NEST

The requirement to automatically enrol staff into a pension plan will come into effect from October 2012, for the largest employers, and will extend to all employers by September 2016.

Further details about the Government's proposals and the issues that employers need to consider can be found here.

While the announcement will no doubt come as good news for those employees who do not currently have access to a workplace pension plan, it will undoubtedly increase costs for the majority of employers, and bring with it potentially detrimental implications for certain employees who benefit from generous employer pension schemes currently, as certain employers seek to reduce existing contribution levels to offset the cost of auto-enrolment.

Under the proposals, all employers will become obligated to automatically enrol employees earning over a set figure into a pension plan once they have completed three months' service. Staff on short term or seasonal contracts, may therefore find themselves outside of the regime. The minimum compulsory contribution will initially be 2% of qualifying earnings (with at least 1% from the employer) rising to 5% (with at least 2% from the employer) in October 2016 and finally 8% (with at least 3% from the employer) in October 2017.

Employees will be given the opportunity, if preferred, to opt out of the scheme. However, those who choose to do so will have to be swift in their decision, so as not to make any unintended contributions before their election is processed.

Tax efficient alternatives to pension funding

There have been many significant changes to pension legislation in recent years. This has dramatically impacted on the tax relief available for pension contributions meaning that an individual's pension and savings strategy may need to be reviewed accordingly.

For example, one might like to consider an alternative pension structure such as a Qualifying Recognised Overseas Pension Scheme (QROPS) or a Qualifying Non-UK Pension Scheme (QNUPS). These can offer various tax planning opportunities, including, in many cases, a beneficial inheritance tax treatment. It is important to seek specialist advice on these types of vehicles to ensure they fit your needs. Equally, more traditional pension planning may still have a value to many people.

What other options are there in the way of tax efficient investments?

You may consider investing in either an Enterprise Investment Schemes (EIS) or a venture capital trust (VCT). These are considered in greater detail elsewhere in these web pages. Alternatively, investing in a Business Premises Renovation Allowance Scheme (BPRA) may also help reduce your tax bill. BPRA schemes provide a significant and flexible tax planning opportunity combined with a 'bricks and mortar' investment. Here, tax relief is available in the form of 100% capital allowances on qualifying expenditure - the renovation of a derelict or unused property within a designated disadvantaged area. Clearly, however, there are risks and other variables to consider before making any investment decisions, and you should seek independent financial advice.

Employer funded retirement benefit schemes (EFRBS)

On 9 December 2010, HM Treasury released new draft legislation to tackle tax efficient remuneration planning ideas involving trusts and other third parties. This includes arrangements such as Employer Funded Retirement Benefit Schemes (EFRBS), which had grown in popularity as unapproved pension vehicles.

From 6 April 2011, cash or assets earmarked (however informally) for employees as part of an arrangement to provide rewards, recognitions or loans for that employee will be caught and will be subject to an upfront tax charge. This includes the transfer of cash, assets, shares/securities, the making of loans and the grant of certain long leases.

Consequently, this could give rise to upfront tax charges on amounts earmarked for employees in the context of relevant arrangements, even where the employee has not benefitted directly. This is clearly an unattractive proposition as PAYE and NIC may apply. Furthermore, anti-forestalling provisions apply from 9 December 2010 and transactions after that date may also be caught.

Further information on the changes in the legislation, and its potential implications, can be found in the briefing document on disguised remuneration.

How we can help: Pensions