pensions, tax & annuities

by Roderick Ramage, solicitor,

first published (by distribution to professional contacts) on 30 November 2010



This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.


The tax regime introduced by the Finance Act 2004, from 6 April 2006 (A-Day), changed the basis on which tax relievable contributions can be made to a pension scheme registered with HMRC.  The first three years of this regime were (relatively) plain sailing and very advantageous for the highly paid.  A complicated system to limit tax relief for the highly paid was introduced by the labour Government for 2009/10/11, which will be replaced by the Coalition Government for 2011/12 with a simpler but still restricted tax regime. 

In his budget speech on 22 April 2009, the then Chancellor’s said this.

“It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1½ per cent of pension savers.  So from April 2011, I will restrict pension tax relief for those with incomes over £150,000 so it is gradually tapered to the same 20 per cent rate the majority of people receive.  We will consult on implementation. I am introducing measures from today to prevent forestalling.”


the allowances

A taxpayer has two allowances.  The annual allowance (AA) is the maximum amount which may be paid in any pension input period (PIP) and on which tax relief is granted.   An individual’s AA is 100% of his or her UK taxable earnings up to the amounts in the following table.  An AA charge of 40% is levied if the AA is exceeded.

tax year




tax year
































The second is the lifetime allowance (LTA), which is the value of the member’s pension fund at any crystallisation date (the date on which all or part of the benefits become payable), taking account of any prior crystallisations, above which there will be a tax charge of 55% of the excess if taken as a lump sum or 25% if taken as pension.  Members with funds at or above the LTA at A-Day or which might exceed the LTA could register for primary or enhanced protection (see 2004 New Year update), and a similar arrangement known as fixed protection will be made when the LTA is reduced to protect existing benefits in excess of £1.5m. 


Finance Acts 2009 and 2010 – tax years 2009/10 and 2010/2011

Pending the then intended restriction on tax relief to the 20% standard rate of income tax for the highly paid from 6 April 2011, the FA 2009, s72 and sch 35 (amended by the FA 2010, s48) established the anti-forestalling provisions mentioned in the 2009 budget speech, which, at the risk of over-simplification, are a claw-back (by a special annual allowance charge) of higher rate relief, with an exception for regular contributions (ie, paid quarterly or more frequently).


treasury statement 14 October 2010 – tax year 2011/12

In its June 2010 budget the Coalition Government announced that it would seek an alternative approach to limiting tax relief on pension contributions, in keeping with the previous government’s aim to reduce the annual cost of pension tax relief by about £4bn.  Anti-forestalling is to be retained, but the previous government’s proposals for the future will be repealed and replaced.

With effect from 6 April 2011 the annual allowance will be reduced to 100% of taxable earnings capped at £50,000.  Tax relief will continue to be given at the taxpayer’s marginal rate of tax.  The deemed contribution to a DB scheme will be calculated using a factor of 16, increased from 10.  In other words, an annual accrual of £1,000 annual pension is to be treated as a contribution of £16,000.  Any excess in a year’s annual allowance will be off-set by unused allowances from the previous three years.  Further measures are expected to ensure that individuals will not have to pay large tax charges from current income but will be able to pay it out of pension.


beware of the PIP

An individual’s or scheme’s pension input period is not necessarily the same as the tax year.  If an individual’s PIP began before 14 October 2010 and will end after 5 April 2011, the £50,000 AA will apply to contributions on and after 14 October 2010, but the whole PIP will be tested against the £255,000 AA, so a contribution made now if the PIP ends after 5 April 2011 could be liable to both a special annual allowance charge and a normal AA charge.  For those whose PIP ends before 6 April 2011, there may be scope for paying additional contributions within the £255,000 AA and obtaining tax relief, even though there may be a special annual allowance charge.



At present, with an exception, designed for persons with “principled objection to mortality pooling”, in the form of a drawdown known as alternatively secured pensions (with a penal tax charge of 82% on death), a person with tax relieved pension savings must secure a pension at age 75 by the purchase of an annuity.  This obligation will, as announced in the June 2010 emergency budget, cease from 6 April 2011, when new arrangements, expected to be in the Finance Act 2011, come into force.  Nothing will prevent an individual from purchasing an annuity, but, as alternatives, two forms of drawdown will be available from age 55 without any upper age limit. 

The present arrangements for unsecured pensions for members below age 75 and alternatively secured pensions for those at and above that age will be replaced by a new arrangement described in the draft clauses of the Finance Bill as drawdown pensions and in the consultation papers as capped drawdown.  The annual amount of capped drawdown may not exceed 100% of the comparable annuity with triennial reviews up to age 75 and annual reviews from age 75.

The other form of drawdown, to be known as flexible drawdown, will be available to individuals who satisfy the minimum income requirement (MIR).  The MIR is that the member has a guaranteed annual income of £20,000 (to be reviewed every five years) payable for life, which will include state pensions, pension annuities and scheme pensions, but not drawdown income or non-pension annuities.  A person who satisfies the MIR may draw down any amount from his or her pension fund, taxable as income.

On the death of the member, in either form of drawdown, the remaining funds will be available to be used to provide pension for dependants, lump sums taxed at 55% (but free from inheritance tax) or free of tax if under age 75 and benefits have not been taken or tax free charitable lump sums.



health warning

This note is based largely on government announcements including papers published by HM Treasury at, draft clauses for the Finance Bill 2011 and various commentaries.  The changes in the law, if enacted, may be very different from the changes as described above.


copyright Roderick Ramage

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