Loopholes and pitfalls of the latest pension proposals

4 min Read Published: 23 Nov 2010
Picture by sypix - flickr

The latest pension proposals, see my article the pension tax relief changes explained and who they affect, could leave the door open for some interesting loopholes which could be exploited as well as some pitfalls. I've listed some of these below as a FYI and to highlight why top earners should keep an eye on developments in the pensions world :

  • The option to carry forward unused £50,000 allowances, from 3 previous tax years, can only be done if you had a pension plan in existence in the tax years in question from which you want to carry forward.
  • Strangely it appears irrelevant whether you actually contributed to any pre-existing pension plans to be able to carry forward any unused allowance for that tax year. They just needed to exist.
  • You will not be forced to utilise any unused allowances via the aforementioned pre-existing pension contract. You can fund whatever pension contract you wish.
  • Assuming all the above boxes are ticked it may be possible for someone to pay up to £200,000 into their pension next year and receive tax relief at their highest marginal rate
  • It appears that your earnings from the carry forward years (08/09 to 10/11) will be irrelevant. So you could have earned nowhere near £50,000 in those years yet still qualify to carry forward your unused allowances. The only determining factor is that you have the relevant amount of earnings for the 2011/12 tax year.
  • The way the carry forward is calculated is not simply cumulative. Basically, the available carry forward allowance will be assessed on a year by year basis and will be deemed used up if you fund in excess of £50,000 in a later year. The table below containing two contribution histories helps illustrate the point. It does mean that apparently timing is everything - another anomaly!
Year 08/09 Year 09/10 Year 10/11 Max carry forward allowance
£0 £150,000 £0 £50,000
£0 £0 £150,000 £0
  • People generally think the period of time the annual allowance relates to is a tax year. This is not strictly true, it is actually tied to what is know as a Pension Input Period (PIP) which just so happens to be the same as the tax year in most cases. But there is an anomaly whereby people who have changed their PIP (or where it is already set by default) to end after 6th April 2011 could already be subject to the new £50,000 limit and could incur a tax charge if they save in excess of this, after 14th October 2010 (the date all these pension proposals were announced). If people want more information on this then drop me a line via our facebook page. Depending on the level of demand I may publish an article on this.
  • Salary sacrifice (in exchange for pension contributions) is looking likely to once again become tax advantageous.
  • Current proposals leave the door open for almost unlimited cash withdrawals from pension pots once individuals hit age 75, as long as they can show they will not a burden on the state.
  • Those leaving it late to fund pensions could be hit twice by the new rules

I must stress that the current proposals are still to be consulted on so all of the above may change. So watch this space as we should know the lay of the land by the end of the year, and of course I’ll decipher it all for you.

Looking for a financial adviser near you?

Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.

Alternatively, Hargreaves Lansdown, one of the UK’s largest firms providing restricted financial advice, is offering a £200 John Lewis voucher* to new clients.