The Annual Allowance represents the maximum annual contribution limits to approved pension plans.
The Annual Allowance is £255,000 in the 2010/11 tax year and, until recently, was expected to remain fixed until 2015/16. However, the Government is considering reducing this level to £30,000 (if up to 50% tax-relief is afforded) or £45,000 (if up to 40% tax-relief is afforded) p.a.
Such an approach will be easier to understand, and will enable ‘high income’ individuals to continue to benefit from full (or almost full) tax-relief on contributions to a registered pension scheme.
However, reducing the Annual Allowance significantly may mean that many members who are not ‘high income’ individuals may now see their tax-relief on pension provision restricted. An example would include a member who wishes to make a lump sum pension contribution in lieu of receiving bonus or taxed redundancy / severance payment.
It is important to remember that the Annual Allowance does not apply in the year that benefits are ‘vested’ (e.g. when an annuity is purchased). In this year, contributions are only restricted to the higher of £3,600 and 100% of taxable earnings, allowing some additional scope for pensions planning.
Nonetheless, if the intention for certain individuals is to target a certain level of benefit, it may become increasingly that annual contributions match the Annual Allowance as it will be tax- inefficient to make higher levels of contributions at a later date to offset a lack of earlier planning.