Financial Secretary to the Treasury, Mark Hoban MP, announced today that the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.
This measure will raise £4 billion per annum in steady state and will help reduce the record Budget deficit that this Government inherited. It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers - 80% of those will have incomes over £100,000.
The Government is committed to protecting individuals on low and moderate incomes as far as possible. To protect individuals who exceed the annual allowance due to one-off “spike” in accrual, the Government will allow individuals to offset this against unused allowance from previous years.
We will also consult on options enabling people to meet tax charges out of their pensions in November.
In order to protect the public finances it is necessary to introduce the reduced annual allowance from April 2011. The Government plans to introduce the reduction in the lifetime allowance from April 2012.
Mark Hoban said:
We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.
The Coalition Government believes that our system is fair, will preserve incentives to save and - compared to the last Government’s approach - will help UK businesses to attract and retain talent.
Notes for editors
The Coalition Government confirmed in the June Budget that it is committed to reform of pensions tax relief and would continue with plans that it inherited to raise revenues from restricting pensions tax relief from April 2011. However, the Government had reservations about the previous Government’s approach. It felt that this approach could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness. These concerns were shared by representatives of the pensions industry and employers.
The June Budget announced that the Government was considering an alternative approach to restricting pensions tax relief, involving reform of existing allowances. A discussion document on the subject “Restriction of pensions tax relief: a discussion document on the alternative approach” was published in July 2010, inviting views on a range of issues around the precise design of any such regime.
Throughout the summer an informal consultation was held, with a wide range of pensions professionals, industry bodies, employers and individuals’ representatives across the public and private sector engaging with HM Treasury and HM Revenue & Customs. The Government received 238 written responses, 183 of which were from organisations. The Government is grateful to all those who have provided views and participated in discussions, and will continue to work closely with interested parties to ensure that the reform is introduced as smoothly as possible.
Almost all of the responses to the discussion document welcomed the alternative approach as a more workable way of restricting pensions tax relief, and one which would also preserve incentives to save. However, several respondents noted the challenges for defined benefit schemes and their members, unless mitigated by specific measures in the design of the overall regime.
Any reform must be sustainable in the long-term. The discussion document the Government published in the summer noted that a reduction in the annual allowance to between £30,000 and £45,000 could achieve this objective. However, the Government has decided that targeting the lifetime allowance alongside the annual allowance enables the latter to be £50,000. This will ensure that fewer individuals on low incomes are affected by the regime.
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