Tax changes will affect retirement

BUSINESS men and women planning for their retirement are being urged to take note of new changes to pension savings tax.

The Government has announced a reduction in the maximum amount of pension savings which will benefit from tax relief.

Ministers have announced they aim to replace a series of complicated changes, put on the statue book by the previous government, which were due to start next April and which targeted high earners.

Instead, the new reduced annual allowance for tax-free pension saving will apply to everyone.

This lower sum is the amount by which your pension pot can grow each year, above which the surplus is taxed.

David Dowson, partner at Lloyd Dowson which provides financial services to companies across Scarborough, said: “With all these changes happening in 2011 It is now essential that business owners and higher paid employees sit down with their Advisor and discuss all the options for retirement planning.

“If you want a comfortable retirement you must act now.”

The Government has outlined a number of measures which it says are being introduced in order to cut several billion pounds from the tax relief given to pension savers each year to help balance the country’s economic defecit.

The main changes are:

l The reduced annual allowance for 2011-12 will be £50,000, rather than £255,000.

l From April 6, 2011 the more restrictive interim allowance of £20,000 for high earners will be removed.

l There will be a carry-forward rule that allows unused annual allowances from the previous three tax years to be used.

l £50,000 of annual allowance is equivalent to a final salary-pension accrual of £3,125, whereas previously £50,000 was equivalent to £5,000.

l The lifetime allowance - the maximum level of benefits that a member can draw from all registered pension schemes without incurring penal tax charges - will be cut from £1.8 million to £1.5 million from April 6, 2012.

l Tax relief for all pension saving up to the new allowance will be granted at a taxpayer’s highest rate of income tax, with any excess taxed as income tax through self-assessment.