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Media Briefing Note: Pension Tax Legislation Expected on 9 December 2010

08 December 2010

LONDON, 8 December 2010 -

What's new?

The Government is expected to publish draft clauses for the 2011 Finance Bill on 9 December 2010.  The draft legislation should include provisions covering the reductions in the annual and lifetime allowances for members of registered pension schemes, announced on 14 October this year.

Of particular interest in relation to pensions will be:

  • Confirmation of plans to reduce the lifetime allowance, plus details of any transitional protection for members whose pension planning has been based on a lifetime allowance of at least £1.8m.
  • The exemptions from the annual allowance (if any) that apply if a member takes an enhanced pension on early retirement on grounds of ill health.
  • Further indications of HMRC's approach to limiting opportunities for tax avoidance, including restrictions on the use of funded or unfunded retirement benefit schemes.

Background - the 14 October announcements

On 14 October this year, the Treasury confirmed its approach to restricting the level of tax relief available to members of registered pension schemes.  Key points:

  • The annual allowance will be reduced to £50,000 from 6 April 2011, for defined benefit and defined contribution schemes.
  • The current exemption from the annual allowance charge in the year in which all benefits come into payment from an arrangement will be abolished.
  • Death benefits and total commutation in cases of serious ill health will be exempt from the annual allowance.
  • The Government is looking to exempt some ill health benefits from the annual allowance.
  • Enhanced benefits on redundancy will not be exempt from the annual allowance.
  • The lifetime allowance will reduce to £1.5m in 2012/13.


Jane Samsworth, partner and practice head of pensions at Hogan Lovells, said:

"The reduction in the annual allowance means that many more people now need to consider the value of annual increases in their pensions when planning for retirement.

Responsible employers frequently enhance pensions for employees forced to leave the workplace early because of ill health. While we understand the concern to prevent bogus ill health claims being used as a means of tax-avoidance, penalising such enhancements in genuine cases of incapacity would be harsh. Let us hope the Government agrees.

Use of unregistered arrangements has been popular for high flyers - whether this continues to be tax-efficient remains to be seen."

Further information

For further information about changes to the annual and lifetime allowances, please contact:

Jane Samsworth

020 7296 2974

Rachael Droog
PR Coordinator
020 7296 2780

Notes: what are the annual and lifetime allowances?

1.                  The annual allowance, introduced on 6 April 2006 ("A-Day"), is the maximum increase in value in registered pension schemes that an individual may benefit from in a year without incurring a tax charge (known as the "annual allowance charge").  For the tax year 2009/10 the annual allowance was £245,000.  Any increase in value in excess of the annual allowance will be subject to the annual allowance charge, currently 40%.

2.                  For the purposes of the annual allowance, contributions to an individual's defined contribution arrangements in the year count at face value.  The increase in value in any defined benefit arrangement (calculated by a prescribed formula) is also taken into account.

3.                  The lifetime allowance, currently £1.8m in most cases, is the maximum total pension saving an individual may make with favourable tax treatment.  Benefits must be tested against the lifetime allowance whenever there is a "benefit crystallisation event" (broadly, when a member's benefits come into payment). 

4.                  For the purposes of the lifetime allowance, the total value of an individual's defined contribution funds plus the value of any defined benefits (calculated in accordance with a prescribed formula) are taken into account.  Funds in excess of the lifetime allowance are subject to the lifetime allowance charge.

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