From 6 April 2014, the annual limit for pension tax relief reduces from £50,000 to £40,000. The lifetime limit reduces from £1.5 million to £1.25 million. Any excess in the value of your pension benefits over the lifetime allowance is subject to a 25 per cent rate if taken as taxable pension or a 55 per cent rate if taken as a lump sum.
For employees in occupational schemes, these limits include the employer’s contributions. In a final salary pension scheme, a pay rise as small as £3,000 a year could exceed this lower annual limit. For those who have already built up large pension funds it may be possible to apply for fixed protection which, subject to certain conditions, could allow you to preserve a higher lifetime allowance.
In a more wide-ranging review of pensions, it is planned to introduce a new single-tier state pension from 2016. One of the changes involved includes ending the contracted-out rebate for national insurance on defined benefit occupational pension schemes. Affected employees and their employers will pay more national insurance.
The change will also end the state second pension.