Talking to your clients - The rules on tax relief for pensions

The rules on tax relief for pensions were changed not that long ago and may have affected a number of clients. Well, they look set to change again, to reduce the annual allowance (AA) to £40,000 and the standard lifetime allowance to £1.25m from 2014/15 onwards.

The amount of pension savings that will count towards the AA for 2014/15 is the total of savings made in 'pension input periods' that end in that year.

In terms of the carry forward of unused relief, HMRC state:

'This means that the amount of any unused allowances arising from the tax years 2011-12 to 2013-14 and available for carry forward to 2014-15 and subsequent years will still be based on the £50,000 limit.

The effect of this is that for 2014-15 you will be able to carry forward up to £50,000 unused annual allowances from each of the tax years 2011-12 to 2013-14.

For 2015-16 you will be able to carry forward up to £50,000 unused annual allowances from 2012-13 and 2013-14, and £40,000 from 2014-15.

For 2016-17 you will be able to carry forward up to £50,000 from 2013-14 and £40,000 from 2014-15 and 2015-16.'

Where an individual dies in 2012/13 or 2013/14, but a relevant lump sum death benefit is paid on or after 6 April 2014, the relevant lump sum death benefit is tested against the standard lifetime allowance at the time of the individual's death.

Fixed protection again

Legislation also introduces a transitional protection regime (fixed protection 2014) for those with UK tax relieved pension rights of more than £1.25m or who estimate that they may have rights in excess of £1.25m by the time they take their pension benefits. Individuals need to notify HMRC by 5 April 2014 to ensure fixed protection 2014.

This only applies to those who do not have primary protection, enhanced protection or fixed protection under para 14 Sch 18 FA 2011.

Individuals with fixed protection 2014 will be entitled to a personal lifetime allowance of the greater of £1.5m and the standard lifetime allowance. Fixed protection 2014 will be lost if:

• there is a benefit accrual (see below);

• there is an impermissible transfer;

• there is a transfer of sums or assets that is not a permitted transfer; or

• a new pension arrangement relating to the individual is made otherwise than in permitted circumstances. Benefit accrual is broadly:

• for defined contribution pension schemes, no further pension contributions are received by the scheme on or after 6 April 2014; and

• for defined benefits scheme, no further benefits can accrue above a 'relevant percentage' from 6 April 2014 (normally either the annual rate specified in scheme rules as of 11 December 2012 for the revaluation of accrued rights or CPI).

The Government will also discuss with interested parties whether to offer, in addition to fixed protection 2014, a form of personalised protection which entitles individuals to a lifetime allowance of the greater of the value of their pension rights on 5 April 2014, up to an overall maximum of £1.5 million or the standard lifetime allowance. However unlike with fixed protection 2014, individuals with personalised protection would not be subject to any restrictions on future contributions or accruing further benefits.

Obviously, clients may wish to maximise their position over the next year, so help them keep ahead of the game.