Executive pensions

In theory applying from April 2011, for some individuals/schemes the change actually applies to savings made before then. The Government also plans a reduction in the Lifetime Allowance from £1.8m to £1.5m from 6 April 2012.

Employers and individuals have very little time to react .  The key actions are:

• Work out when your arrangements are first affected (see PIP below).
• Establish which employees are potentially affected.
• If appropriate review remuneration/ pension policy, including redundancy and ill-health packages.
• Consider making changes to scheme rules.
• Consider whether to limit bonus sacrifice/ Additional Voluntary Contribution facilities.
• Consider what special one-off opportunities may arise from the new "carry forward" facility.
• Communicate with employees.

The Annual Allowance approach

The principle of the annual allowance is simple. Members of defined contribution (DC) schemes enjoy tax relief on employer and employee contributions up to a maximum of the annual allowance. Contributions that exceed the annual allowance are subject to a tax payable by the individual. Members of defined benefit (DB) schemes need to calculate the "value" of their pension savings during the year, but the same principle applies whereby the excess of this "value" above the annual allowance is subject to tax payable by the individual.

As the pensions policy set by the employer can have a direct impact on an employee's tax bill, the changes cannot be dismissed as a pure personal income tax matter.

We recommend that all employers who have employees affected should review their pension benefit policy now. Changes will need to be introduced urgently and will need careful communication.

The Pension Input Period (PIP)

Each pension arrangement of an individual has its own Pension Input Period (PIP), not necessarily coinciding with the tax year.  Tax in 2011/12 is assessed against pension savings made in the PIP that ends in the tax year 2011/12.  This means that, for some individuals, current levels of pension savings may already be counting towards the £50,000.