November 24, 2008 7:52 pm

Pension savings limits frozen

Pension saving limits will be frozen from 2010 capping tax breaks that top earners might hope to use to avoid the new 45 per cent income tax rate.

The restriction also means that more individuals could face a 55 per cent tax charge on excess pension monies they accumulate.

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The pension lifetime allowance will be frozen at £1.8m and the annual contribution limit at £255,000 for five years from 2010-2011. The lifetime limit is the total fund an individual can accumulate under pension tax breaks.

Although it has not been confirmed that 45 per cent income tax relief will be available on pension contributions, experts said this would be an obvious way for top earners to mitigate the effect of the new higher tax rate.

Leonie Kerswill, tax partner at Pricewaterhouse Coopers, the accountants, said: “The benefits are being capped, but pension saving should become more attractive for those paying the new 45 per cent rate.”

Standard Life, a pensions company, estimated that restricting the lifetime limit also means that individuals who already have pension funds worth above £1.25m will face a 55 per cent tax charge on some of their savings by 2015. This projection assumes a “reasonable” fund growth rate of 6.5 per cent.

Both the lifetime and contribution limits have been increased since their introduction in 2006, and the expectation was this would continue in future.

Even so, Standard Life said that pensions would remain attractive for top earners. “Longer-term investors may even want to deliberately exceed the lifetime allowance and pay a 55 per cent tax charge, as this may produce a better return than investing in an equivalent mutual fund.” said John Lawson, head of pensions policy at Standard Life.

Killik & Co, the financial advisers added that the 0.5 percentage point increase in National Insurance rates would boost the attractions of “salary sacrifice” and “bonus waiver” arrangements for pension contributions. With these, as well as income tax relief, savers make NI savings.

The pre-Budget report papers also confirmed that for those on incomes over £150,000, the rate of tax on dividends will also rise from 32.5 to 37.5 per cent from 2011, while tax on trusts used to pass on wealth will also be aligned with the proposed 45 per cent income tax rate.

Individual savings accounts will be able to invest in bonds issued by multilateral institutions.

Measures were also announced to stop investors in existing film partnerships avoiding tax on deferred income from these schemes.

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