Changes to pension tax rules for high earners are confirmed - pensions advice will be necessaryCharles de Lastic, Managing Director of Bluebond Financial Planning, explains what this means and why you will need further pensions advice.The budget statement confirmed the rules to restrict pension tax breaks for high earners as from 06/04/2011 and will replace the interim 'anti-forestalling' rules introduced in the Finance Act last year.From that date, anyone with a 'high income' will face a 'high income excess relief charge' on any pension made for or by them. There will be no £20,000 special annual allowance or protection for established regular funding. If you qualify as a high earner, you should seek professional pensions advice from a financial planner. Alternative means of funding your retirement may be worthwhile investigating and they will be able to advise you which would be best for your situation.What does 'high income' entail?You will be defined as having a 'high income' if both the following apply in a tax year:-You have a 'gross income' of at least £150,000 and a 'relevant income' of at least £130,000. This means that if your relevant income is below £130,000 you will not be regarded as having a high income even if your gross income exceeds £150,000.What is my 'gross income' for pensions calculation purposes?Any pension contributions that your employer makes (in a money purchase arrangement) added to other income in that tax year itself and tested against the £150,000 income limit.If you have a defined benefit pension, the amount will be valued as the increase in the accrued pension over the tax year multiplied by an age related factor which will vary depending on your age and the normal pension age under the scheme. Pension schemes will be required to supply this information to you within 3 months of a request.What is meant by 'relevant income'?This is not the same as relevant UK earnings, but includes the total income before personal allowances, other reliefs and deductions and is taken after normal deductions and reliefs. It will no longer be possible to deduct your own pension contributions or gift aid donations from your total income when calculating your relevant income.Finally, what is the high income excess relief charge?This is calculated by adding your total pension saving amount to your relevant net income for a tax year and treating it as the top slice of that income. Confused? Yet again, your will need expert help and pensions advice to make sure the charge is correctly calculated.How is the tax charge paid?The tax charge will always fall on the 'high income' earner - irrelevant of who made the pension provision - and is collected via self-assessment. If the charge exceeds £15,000, it can be paid off over 3 years (interest will apply), or the pension scheme can pay the charge but your rights under the scheme will be reduced.There are exemptions. For example, if you draw a serious ill health lump sum or die before drawing your pension.ConclusionAll high earners will need to carefully investigate their overall financial plan and consider alternative means of long-term retirement planning. Good financial planning and pensions advice is essential. You can find out more or contact Bluebond Financial Planning for advice via our website.
For more information click here