Pension contribution limits could face further reform under the coalition government following changes put in by the Labour government.  

Under Labour complex rules limiting tax relief on contributions made by high earners were due to be implemented from April 2011. Tax relief on contributions would taper from 40% to 20% for those with earnings over £150,000 but contributions of up to £255,000 per tax year would be re-introduced following interim anti forestalling measures.  

The coalition’s proposal is that tax relief will be maintained for annual pension contributions at an individual’s highest rate (up to 50%) but the annual limit would be reduced to a lower limit, expected to be between £30,000 and £45,000.   

This is straight forward for defined contribution pension plans (e.g. personal pensions, stakeholder pension and SIPPs) where it is clear what the annual amount invested is. However, for Defined Benefit (Final Salary) schemes a pay rise could create a tax charge unknowingly as any benefit increases are multiplied by a factor of 10 to calculate the pension contribution made. This may be further complicated if the coalition implement their plan to increase the multiplication factor (possibly to 15 or 20).  

In my view lower annual contributions with tax relief would be a positive step as it will remove the complex system for pension contributions due to be implemented under Labour. My fear is, however, that this lower annual limit will include annual ISA contributions (currently £10,200) and thereby decreasing the amount of tax efficient savings an individual can make.  

If this is implemented there will be significant mixed messages given out from the Government who will be disincentivising people from saving whilst at the same time warning that the State cannot support an ageing population.  

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