Pension savers have a whole raft of new rules to get their heads around after the Treasury revealed the pension reforms which it hopes will save £4 billion a year in its efforts to reduce the budget deficit.
The amount that pension savers can contribute to their pension annually and receive tax relief is to be reduced from £255,000 to £50,000 from April next year.
However, as had widely been hoped, tax relief will continue to be given at the pension saver's highest marginal rate, while the new limit is higher than the range of £30,000 to £45,000 which had been predicted.
The Treasury said the move will affect around 100,000 pension savers, of which around 80% will have incomes over £100,000, but confirmed that unused allowances will be able to be carried forward for three years.
The lifetime allowance, which represents the total pension pot that savers can build up over their lifetime and receive tax relief, is also set to be cut, reducing from £1.8 million to £1.5 million from April 2012.
However, the Government is looking into how it can protect those savers with pension funds between the old and new limits.
Another consultation examining whether people should be able to meet tax charges out of their pensions has been scheduled for November.
Members of defined benefit pension schemes are expected to be impacted the most by the reforms.
Standard Life said that the combination of the reduction in the annual allowance, alongside an increase in the factor which is used to calculate the annual allowance for defined benefit pensions accruals, means that some members of such schemes may face tax charges.
Higher earners and those who get significant salary increases are most likely to be affected, although the three year carry forward facility for unused allowances will be able to be used to average out any significant pay rises.
With concessions also being made for people retiring early due to ill health and with regards to death, Andrew Tully, senior pensions policy manager at Standard Lifesaid it was unlikely that any basic rate taxpayer will face a tax charge.
"An annual allowance works in the same way as ISA limits so is simple, clear and easy for people to understand," he added.
"The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want. This change means pensions will continue to be an attractive home for long-term savings, retaining the unique advantage of an upfront tax incentive from the Government."
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