Warning: new pension rules ahead

SWEEPING changes to pensions are in the offing, with high earners being among the most affected. As always, there are winners and losers. “For some the new rules are an opportunity, whilst for others these impose further restrictions,” says Andrew James, advice policy manager at wealth adviser Towry.

Since April 2009, people earning more than £130,000 with a history of irregular pension contributions have been able to contribute only £20,000 a year with full tax relief. Everyone else could put 100 per cent of earnings into their pension, subject to an “annual allowance” set at £255,000 at present.

From 6 April, the “special annual allowance” for top earners will be scrapped in favour of a reduced annual allowance for everyone of £50,000. You’ll be able to carry forward three years-worth of allowances.

Say you’ve only been able to pay in £20,000 in each of the past two years. Under the new regime, you will be deemed to have unused allowances of £30,000 in both of those years.

If you’ve been dissuaded from contributing to your pension completely since 2008, you could stash away £150,000 of unused allowances from the previous three years plus £50,000 for 2011-12 on 6 April coming, then £50,000 on 6 April 2012 for the 2012-13 tax year – a total of £250,000 in little over a year.

Here’s what the experts advise:

Tax relief will be given at your highest marginal rate of income tax – so up to 50 per cent for top-rate taxpayers.

Experts urge them to stash as much into their pension as possible, in case the coalition government adopts Labour’s plans to further restrict tax relief on pension contributions.

Patrick Connolly, a spokesman for AWD Chase de Vere, the independent financial adviser, says: “The government had the opportunity to reduce tax relief for higher earners and the fact it hasn’t is encouraging. There are no guarantees and high earners should – where able – maximise pension contributions now.”

In particular, those who have a long-established regular pattern of pension contributions and can, therefore, invest significantly more than the new £50,000 limit in this tax year should do so.

Take care not to breach the “lifetime allowance”. This is the maximum you can accrue in pension benefits without incurring a tax charge. It is £1.8m at present, but will be cut to £1.5m from 6 April 2012.

Any amount over the lifetime allowance paid in the form of a pension will be subject to a 25 per cent tax charge and the income will still be subject to income tax. If taken as a lump sum, a 55 per cent tax charge will apply.

“Because of the complex nature of the current pension rules, it’s sensible for high earners to take professional financial advice,” says Connolly. “Getting it wrong could mean facing a major tax bill.”

Those in final salary pension schemes should be especially careful, as the multiplier used to value their benefits has increased.

If you’re approaching retirement, you could retire early – before April next year – so you benefit from the higher lifetime allowance. Or you could crystallise pension benefits earlier than planned, while continuing to work.

Alternatively, you could stop membership of the scheme: see if your employer will give you other benefits, such as a higher salary, in lieu of pension contributions.

Pensions aren’t the only way to save for retirement and get tax relief. You can save up to £10,200 in individual savings accounts this year (or £10,680 next).

How about investing in smaller companies? You get 30 per cent tax relief on investments of up to £200,000 a year in venture capital trusts (VCTs), and 20 per cent on investments of up to £500,000 a year in the enterprise investment scheme (EIS).

“Thousands of people are affected by these legislative changes, many of them higher earners who need to find new ways to build a pension,” says Simon Rogerson, chief executive of Octopus Investments. “VCT and EIS vehicles offer an investment solution that is largely uncorrelated to stock markets, so complements more traditional pension investments.”