Pension fund limits

Changes since 6th April 2006

So how much can you contribute? Well, since 6 April 2006, maximum age-related contributions no longer apply. Instead, you are now able to contribute to as many pension plans as you want and there will be no upper limit on the total contribution that can be paid.

However, there will be a limit on the amount of contribution that can benefit from tax relief and this will be the greater of £3,600 and 100% of your relevant UK earnings. Any personal contributions would be paid net of basic rate tax, with any higher rate tax relief being obtained via a self assessment tax return.

More than the greater of £3,600 and 100% of your relevant UK earnings can be paid in but no tax relief will be given. In this event, you may be able to request a refund. If so, any refund must be made within 6 years from the end of the tax year in which the excess contribution was paid. So, if you made an excess contribution in 2006/07, the refund must be paid before the end of the tax year 2012/13.

However, if the total paid by yourself and your employer combined exceeds the Annual Allowance (£215,000 in 2006/07 rising by £10,000 each year until 2010/11 when it will be £255,000) you will be subject to a 40% tax charge on the excess. The only exception to this would be where an individual dies or vests all their benefits in the scheme during the tax year in which the Annual Allowance is exceeded.

At any time from age 50 before 6 April 2010 and age 55 thereafter, you will also be able to take up to 25% of the value as a tax free lump sum, as long as the cash sum does not exceed 25% of your unused lifetime allowance at that time. The balance is then used to purchase an annuity or to take income withdrawals, both of which would be taxed as earned income.

The Lifetime Allowance

The main feature of the new regime is the Standard Lifetime Allowance (SLA). If the value of the benefits being taken - together with the deemed value of any benefits taken previously - is over an individual's lifetime allowance then a Lifetime Allowance Charge (LAC) is due on the excess.

The Standard Lifetime Allowances for the first five tax years after 5 April 2006 are as follows:
2006/07 - £1.50m
2007/08 - £1.60m
2008/09 - £1.65m
2009/10 - £1.75m
2010/11 - £1.80m

There are however, a limited number of situations where individuals will have a higher lifetime allowance. For example:

• If the individual is not a UK resident.
• In respect of transfers from a recognised overseas scheme.
• In some circumstances where an individual has an entitlement to benefits from a pension credit under a pension sharing order.
• If the individual opts for transitional protection (enhanced or primary) in respect of their rights accrued prior to 6 April 2006.

Conversely, people with a lower retirement age under the current pre A-day regime (such as footballers) may find that their lifetime allowance is reduced.

But if the benefits value at vesting exceed the SLA (or an enhanced personal lifetime allowance - for example where primary protection has been selected by an individual who had a benefits value of £1.5 million or over at A-day) then it is the difference between the two that is subject to the LAC.

The excess can either be taken as a lump sum, an income or a combination of both.
Any excess taken as income is subject to tax at 25% and any excess taken as a lump sum is taxed at 55%. However, it should be noted that where the excess is taken as income net of 25% tax, the income itself is then taxed at the recipient's marginal rate, which therefore means that the effective rate of tax is still 55% for a higher rate taxpayer.

If you require any advice or want to find out more about the lifetime allowance and how you might be affected, please contact us.

Questions - Contact us by email or telephone on 0207 407 8787.