New tax relief restrictions
Tax relief on pension savings is restricted. The Annual Allowance (AA) is set at £50,000.
The value of your pension savings in a tax year depends on whether your savings are defined benefit (your main scheme benefits including Added Years), or defined contribution (e.g. AVCs). Each component is valued and then added together to see if the value exceeds the Annual Allowance. The benefits are valued as follows:
Defined benefit - this is the capital value of the increase in your pension and lump sum over the previous tax year. To arrive at the capital value of your pension it will be multiplied by a factor 16. This figure is then added to your lump sum. There is an allowance for inflation measured against the CPI as at the previous September.
Defined contribution - this is the amount of the contributions paid by you and BT (e.g. SMART Pensions, and bonus sacrifice where applicable) to the AVC funds. This amount is then added to the capital value of your defined benefits as calculated above.
If the total increase in the capital value of your defined benefits plus your defined contributions in a year exceeds £50,000, you may be liable to pay tax at your marginal rate on anything above that amount.
To mitigate the effect of this, any unused allowance from up to three previous tax years can be carried forward to offset against contributions in excess of the Annual Allowance in a single year. This 'carry forward' provision will be available against an assumed Annual Allowance of £50,000 for the tax years 2008/09, 2009/10 and 2010/11.
You will receive tax relief on your pension savings at 20%, 40% or 50% as appropriate, up to the new Annual Allowance. This means that if you pay £100 the tax relief the Government gives you on that is worth £20 (£40 if you are a higher rate tax payer and £50 if you are an additional rate tax payer), making your net contribution £80 (£60 if you are a higher rate tax payer and £50 if you are an additional rate tax payer). Any pension savings above the Annual Allowance will be taxed as a benefit in kind with the tax collected under self assessment.
Alternatively, if the tax payable is more than £2000, you may ask the BTPS Trustee to pay the tax on your behalf and have your benefits reduced accordingly.
In addition, the Lifetime Allowance (i.e. the total capital value of the benefits that can build up in all registered pension schemes during a person's lifetime and benefit from tax relief), will be reduced from £1.8m in the 2011/12 tax year, to £1.5m from 6 April 2012.
If you are not sure how you may be affected by these restrictions, you may wish to speak to your tax adviser, or obtain independent financial advice.
Further information is available on the HM Treasury website.
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