Changes to the Annual Allowance from 6 April 2011

Introduction
On 22 April 2009, the Labour Government announced that too much tax relief was being
given on pension contributions for high earners and that it would introduce a new tax from 6
April 2011 to remove all tax relief for high earners. A special tax was applied to the 2009/10
and 2010/11 tax years for high earners to restrict tax relief to basic rate in advance of the
2011 changes.
When the new Coalition Government came to power, it reviewed the complicated proposals
for the tax on high earners and decided to scrap them. Instead it decided to amend the annual
allowance (an existing tax) to raise the additional revenue that it required.

In summary, the annual allowance will be reduced to £50,000 from 6 April 2011 and unless
the total pension contributions made to all the pension schemes that you and your employer
contribute to exceed £50,000, you are unlikely to be affected. However, if you are close to or
likely to exceed this contribution limit, then read on.

Background
The annual allowance was introduced on 6 April 2006, and is a tax levied on excessive
pension contributions (or excessive pension accrual). The annual allowance was £215,000 in
the 2006/7 tax year and had increased to £255,000 by the 2010/11 tax year.
From 6 April 2011, the annual allowance will be reduced to £50,000 and the circumstances in
which the tax will apply will change.

Contributions
Pension contributions of up to £50,000 may be made a pension input period (PIP) ending in a
tax year and receive full tax relief. If contributions in excess of £50,000 are made then an
annual allowance tax charge will apply on the excess.
The tax rate will be your marginal tax rate i.e. 20%, 40% or 50%, rather than the current flat
40% rate.

Pension Input Periods (PIPs)

The level of contributions are assessed against the annual allowance over a period known as
a pension input period (PIP), which is usually twelve months long (but may be ended earlier in
certain circumstances). For the purposes of this test, it is the tax year in which a PIP ends that
is used to assess the annual allowance tax charge (if any).
PIPs are not automatically aligned with tax tears or scheme years. The first PIP starts by
default when the first contribution is received by your pension scheme after 6 April 2006.
The contributions made over each PIP which end in a tax year are tested against the annual
allowance. It may be possible to rearrange your PIPs so that they end on a date that is more
convenient for you
When does the annual allowance test apply?
There is an exemption currently from the annual allowance test for the year that you retire and
take all of the benefits from a pension scheme. This exemption will be removed from 6 April
2011 which means that the scope to enhance or top up benefits prior to or at retirement will
be reduced.
The only remaining exemptions will be:
 Death
 Serious ill-health if a lump sum is paid in place of the pension
 ill-health where the pension scheme has received evidence that you will not be able
to undertake any gainful work at any time in the future

Transitional provisions
To ease the transition from the level of the current annual allowance to the reduced annual
allowance there are some complicated rules in place for PIPs which end in the 2011/12 tax
year.
If pension contributions in excess of £50,000 are to be made during a PIP that ends in the
2011/12 tax year, then you will need to consider the tax implications of this for you. This will
also be the case where you have multiple pension arrangements which will have different
PIPs.

Carry forward
Carry forward has been introduced to protect those who usually have pension contributions
below the annual allowance but who may exceed it in a tax year.
It will operate by allowing unused annual allowance to be carried forward from the previous
three tax years. The unused annual allowance is calculated assuming the annual allowance
figure in those years was £50,000. Here is an example:

2008/09 2009/10 2010/11

Annual Allowance £50,000 £50,000 £50,000
Contributions £35,000 £25,000 £40,000
Unused AA £15,000 £25,000 £10,000
Cumulative £15,000 £40,000 £50,000

In the example above, unused annual allowance of £50,000 could be carried forward to
2011/12. Once pension contributions of at least £50,000 are made in 2011/12, then the there
would be scope for up to an additional £50,000 to be made.

What next?
If you do not have contributions in excess of £50,000, then no further action may be
necessary. However, if your current level of contributions is in excess of £50,000 you may be
affected by the new rules.
If you are considering making changes to the level of your contributions, making single
payments, or retiring soon and think that you may be affected, we strongly recommend that
you take independent financial advice.
It should be noted that the legislation relating to the reduced annual allowance is still in draft
form and therefore subject to change. While we expect the major proposals to go through,
some of the technical aspects may change. You are therefore responsible for making sure
that any action you take fits with the final form of the legislation.
Remember, the amount of contribution you can make in the 2010/11 tax year may also be
restricted by anti-forestalling measures (these apply if your relevant income is over £130,000).

The information above is based on Bluefin’s understanding of current UK law and taxation as
of April 2011, which may change in the future. HMRC policy, practice, and legislation may
also be subject to change. This document does not constitute independent financial advice.