retirement

Pension Annual Contribution Allowance 2011 and 2012 Explained

The Treasury has confirmed new legislation with effect from 2011 and 2012 confirming annual allowances, the maximum you can pay each year in a pension contribution and lifetime allowances, the maximum value of pension funds that you take in your lifetime.

Annual Allowance from April 2011 – reduced to £50,000

• Maximum yearly pension contributions (including employers and tax relief) £50,000 pa (old rule £255,000)
• Final Salary Pension Increases in the Year: Rises will use a new factor of 16 X (old rules 10 X)

• Gross Individual Pension Contributions plus Company contributions = Total Annual Contribution
• Excess Contributions: if you and your employer excess the annual allowance, a tax charge is levied.
• Final Salary Schemes are different and care should be exercised to calculate an increase in benefits to give an annual allowance equivalent value
  

Example Final Salary Valuation 1: Small payrise and additional year service

• Accrued Pension Entitlement This Year £10,000 pa
  
• Accrued Pension Entitlement Next Year £11,000 pa
  
• Increase = £1,000 pa. 
  
• Value for Annual Allowance Calculation £1,000 X 16 = £16,000
• No Tax Charge

Example Final Salary Valuation 2: A Payrise May Cost You

• Accrued Pension Entitlement This Year £10,000
• Accrued Pension Entitlement Next Year £14,000 (because you had a promotion with a much higher salary meaning a higher pension entitlement)
• Increase = £4,000 pa.  Value for Annual Allowance £4,000 X 16 = £64,000
• £64,000 is over £50,000 Annual Allowance Limit = TAX CHARGE on £14,000 Excess