The method of valuing defined benefits for annual allowance purposes will be a fixed rate multiplier of 16 – as opposed to the current multiplier of 10 – meaning that a £1,000 increase in annual pension benefit is now treated as being worth £16,000, instead of £10,000. Broadly speaking, annual increases in pension benefits are measured by comparing the value of the pension which would have been payable at the start, and end, of the year. Deferred members will be exempt, and the Government also says that it will include an allowance for revaluation of accrued rights for active members.

In addition, the carve-out from the annual allowance, which currently applies in the year the benefits are taken, is to be abolished, although there will be exemptions for serious (terminal) illhealth and death. There will be further consideration of an exemption for other cases of 'major' ill-health. However, the Government has rejected calls for further exemptions for redundancy or for members claiming enhanced protection.

There will be a new facility so that, where a member does exceed the annual allowance in any given year, unused allowance from up to three previous years will be available to offset against excess pension savings. It is hoped that this will mitigate the risk of members on lower to moderate incomes being caught by oneoff 'spikes' in accrual. Carry-forward will be available against an assumed annual allowance of £50,000 for the tax years 2008/09, 2009/10 and 2010/11.

Any benefits above the annual allowance would not be taxed at a fixed rate, but at a rate tailored to recoup the full marginal rate income tax relief that the member has benefited from.

Lifetime allowance changes

The lifetime allowance, the maximum level of benefits that a member can draw from all registered pension schemes without incurring penal tax charges, is currently set at £1.8m, but is to be reduced to £1.5m.

However, the Government is minded to do this only from 6 April 2012, recognising that before then it needs to consider ways of protecting individuals who have already made saving decisions based on the higher existing level.

Helpfully, the 'trivial commutation lump sum' will be de-linked from the lifetime allowance so that the maximum will remain £18,000, rather than fall to £15,000.


The Government has stated that employee benefit trusts (EBT) and employer financed retirement benefit schemes (EFRBS) are to be "no more attractive than other forms of remuneration". The draft legislation for the Finance Bill 2011 is designed to ensure that income tax and national insurance contributions (NICs) on employment income are not avoided or deferred through the use of trusts or other intermediaries, including EBT's and EFRBS. This is in keeping with the changes to the pensions tax regime from April 2011.

The legislation will have effect on and after 6 April 2011 and apply to rewards which are earmarked for an individual employee or otherwise made available on and after that date. In addition, anti-forestalling provisions apply to the payment of sums and the provision of readily convertible assets for the purposes of securing the payment of sums (including loans) where the sum is paid or the asset is provided between 9 December 2010 and 5 April 2011 where, if paid or provided on or after 6 April 2011, they would be caught by the legislation.

Child benefit

The changes in child benefit and its removal for higher rate taxpayers may have a significant effect on a number of employees. A possible solution would be to offer employees salary sacrifice for pension contributions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.