New pension allowance rules will hurt if you have just started to save
Question: I would like to use a sizeable inheritance sum I have just come into for my pension but have heard that the rules have changed.
Stephen Hill, senior partner with S Hill & Co replies:
Answer: One of the main impacts of the pension rule changes that came into effect from April 6 is that the annual pension allowance has been reduced from £255,000 to £50,000.
This obviously restricts what high-earning savers can contribute to their pension but on the plus side up to 50% income tax relief is now available. If you contribute more than £50,000 this year, the excess will be subject to a tax change to effectively cancel out any tax relief.
However, the introduction of the Carry Forward system will help clients who are able to save more than £50,000 in their pension this year.
Basically any unused annual allowance from the three previous tax years can be carried forward into the current tax year, but only if you are able to fully use this year's tax allowance. For instance, if you contributed £100,000 into pension for 2010/11, and can contribute £50,000 for this year, you can technically contribute another £155,000 in this current tax year.
However, while this will be very attractive to some people, it's not available to people who have just started a pension scheme this year.
Company directors will have scope to make large contributions still under Carry Forward, and for those making personal contribution, it should be noted that tax relief will be limited to 100% of the individual's UK relevant earnings for that tax year.