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UK tax blow for pension pots

By Bill Blevins [email protected]

Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

The UK tax free allowance on annual contributions to a pension plan has been slashed to 50,000 Pounds Sterling from 255,000 Pounds in a bid to raise four billion a year for the cash strapped Exchequer.

The maximum amount that a person can save in a pension pot tax free over their lifetime, the lifetime allowance, has been cut to 1.5 million from 1.8 million Pounds to replenish the coffers by around 500 million.

The Treasury estimates that the measures will hit 100,000 pension savers, of whom 80 per cent earn more than 100,000 Pounds. Industry analysts estimate that many thousands more could be affected including anyone who pays a lump sum into their pensions and long-term members of final salary schemes who receive large pay rises near to retirement.

Inflation will have an impact too if it rises in the future as the caps are not expected to increase in line with inflation.

The new annual allowance will come into effect from April 6, 2011 and the cap on the lifetime allowance from April 6, 2012.  Any UK taxpayers considering putting between 50,000 and 255,000 Pounds into their pension pot may wish to do so before the start of the next UK financial year.

Any Britons living outside the UK would need to be eligible and have UK earnings to be able to contribute. 

The previous Labour government originally proposed targeting those earning over 150,000 Pounds and an annual cap of 30,000 to 45,000 Pounds instead of 50,000.

The new measures introduced by the present Lib-Dem coalition government came in response to protests from the pension industry that Labour’s proposals were too complicated. 

Many pension experts welcomed the new measures. “This is a welcome move to simplify the rules for savers and will encourage people to keep saving into a pension. From the outset we have promoted the benefits of a 50,000 Pound annual allowance. This is a much more practical way to incentivise pension saving through a simple, easy to understand system compared to the overly complicated proposals of the previous government to gradually lose all tax relief after 150,000 Pounds of income,” said director general of the Association of British  Insurers, Maggie Craig.

Gross tax relief on pensions is 29 billion Pounds a year, and six to seven billion of that is for those on incomes of 150,000 Pounds or more, a Treasury spokesman said.

Financial Secretary to the Treasury, Mark Hoban, stated that the four billion raised per annum will help to reduce the record budget deficit and will be targeted at those who make the most significant pension savings. Financial experts questioned whether the measures would raise the amount anticipated by the government.

Tax relief will be given at an individual’s marginal rate of tax, meaning that those earning more than 150,000 Pounds per year will receive 50 per cent tax relief on contributions under the 50,000 annual allowance. People who are in the 1.5 million and 1.8 million range will undergo some transitional measures.

Taxpayers will be able to carry forward three years of unused allowance which will benefit those who make one-off large contributions that takes them over the limit.

Employees in a final salary scheme where contributions are calculated by a multiple of ten will find this increased to a multiplier of 16, resulting in reaching the annual limit faster.

However, there are measures to ensure that indexation of pensions will be excluded when calculating the value of their “defined benefit” annual allowance.

Costs of UK state pensions abroad

More than a million retirees on a UK state pension live overseas and just over a half live in countries where the UK pension is frozen, either at the rate they were when they moved or when the pension payments started, saving the British government 2.5 billion Pounds annually in health, social care and benefit costs.

To up-rate the frozen pensions would cost the Treasury at least an extra 500 million a year.

According to the International Consortium of British Pensioners, even if full pension parity were paid for and all British pensioners around the world received annual up-ratings to their British state pension, savings to the government would still be two billion Pounds per year, and total 31 billion over the next 15 years.

In March, the European Court of Human Rights ruled that the UK’s refusal to link pensions to inflation in certain countries was “not discriminatory”.

At a hearing in 2009 lawyers representing Britain agreed that the cost of rectifying this anomaly would be less than one per cent of the annual national insurance income.

Britons who retire in Europe, the USA or a few other countries receive index-linked UK state pensions, but those who retire to British Commonwealth countries will have their pensions frozen.

For every person who remains in Britain on a UK state pension, the net public cost to the taxpayer is around 4,000 Pounds per year. In 15 years time the cost is forecast to rise by only around 1,000 Pounds.

If affected by the new pension rules you could find yourself paying more tax. This would be a good time to consult an experienced adviser like Blevins Franks to review your pension arrangements.

For peace of mind ask them to review your investments as well to see if they are best placed to benefit from tax mitigating and wealth protection structures which help provide financial security through your retirement.

To keep in touch with the latest developments in the offshore world, check out the latest news on the Blevins Franks website by clicking the link on the right of this page.