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Savers and business owners with large pension pots are set to be hit by changes announced in the government’s recent autumn statement.
Chancellor George Osborne announced a reduction in the annual pension allowance from £50,000 to £40,000 with effect from April 2014. The details have yet to be announced, but it is anticipated that carry forward of unused allowance will follow the current format, with the £50,000 limit applying when appropriate.
The government has also reduced the lifetime pension allowance from £1.5m to £1.25m. Again, details have not been published, but it is thought that protection at the current level will be available providing no new contributions are made.
The chancellor has said that the move will aim to recover about £1bn of the tax relief currently allocated to people saving in pension schemes.
Kerry Houghton, SIPP & SSAS business development manager at Taylor Patterson, said that the uncertainty around future levels of allowance makes it very difficult to advise on the best route for individuals to take.
She said: “A significant number of individuals are likely to apply for it now, suspending contributions, but may well break this protection in the future if their funds don’t reach the lifetime allowance at the point of retirement. Contributions will be made at the last minute and only if cash flow allows at the time. This has the effect of discouraging saving for the future now.
“The chancellor stated it will only impact the top one per cent of people, but we feel in practice it could be a lot more than that. In particular, business owners who might be coming close to retirement could look to put larger contributions into a scheme to allow them to catch up on benefits.
There are steps that some people can take to minimise the impact of the changes on their pensions, for example, by contributing the higher amount up until 5 April 2014. However, due to the complexities of pension contribution rules, it’s best to seek expert advice first.”
For more information about annual pension allowances, please contact Kerry Houghton on 01772 555073 or email firstname.lastname@example.org.