Standard Life PBR comment -

Pension allowances frozen until 2016 - more people to face 55% pension tax charge

The Government has announced today that the pension lifetime allowance will be frozen at ?1.8 million between 2010 and 2015.

This means any individual who has a pension fund above ?1.25m today, and achieves reasonable fund growth of 6.5%, will face a 55% tax charge on some of their fund by 2015.

The lifetime allowance was introduced in April 2006 (A-Day).

This means people who have funds above a certain level are subject to a 55% tax charge on any excess.

Although some people, who had funds above this level at A-Day, could protect their fund from any tax charge subject to certain conditions.

The lifetime allowance was ?1.5m at A-Day and has increased to ?1.6m in 2007/08 and ?1.65m this year.

It will increase in future to ?1.75m 2009/10 and ?1.8m in 2010/11 (these increases were set out prior to its introduction).

Today's announcement means it will remain at the ?1.8m level until, at least, 5 April 2016.

In a similar way the annual allowance which is the maximum tax efficient pension contribution will be frozen at ?255,000.

This is currently ?235,000 and will increase up to ?255,000 by 2010.

Andrew Tully, Senior Pensions Policy Manager, said: 'Although this reduces the real value of the tax efficient pension saving, people may still want to save more than ?1.8m and pay the 55% tax charge.

In some cases, this will be better than saving through a net fund investment such as a unit trust or OEIC, particularly for those paying 45% income tax in future.'.

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