HMRC SIPP Rules

Despite being ‘simplified’ in 2006, the tax rules surrounding pension schemes remains complex, as evidenced by the hundreds of pages that comprise HMRC’s Registered Pension Scheme Manual. The Finance Bill 2011, effective from April 2011 has subsequently updated the rules in an attempt to reduce the amount of tax relief paid in line with the austerity and to try and simplify some of the complexities that existed. What follows is a precis of some of the principles affecting the limits on tax relief.

Pensions are tax efficient in that contributions are tax relievable either through personal tax relief in respect of individual contributions or eligible as a business expense in the case of employer contributions, plus once invested funds grow tax efficiently (generally no income or capital gains tax). Not surprisingly limits apply to what can be contributed and accumulated within a pension fund. These limits apply equally to a SIPP or SSAS.

For the current tax year 2011/12 the level of contributions on which personal tax relief will be granted is up to 100% of UK earnings (from employment or self employment) subject to an overall limit of £50,000, known as the annual allowance. Employer contributions are also subject to the annual allowance. Contributions in excess of the annual allowance are subject to a tax charge levied on the scheme member at their highest marginal rate.

Despite the new rules significantly reducing the annual allowance from £255,000 (2010/11) to £50,000 for the tax year 2011/12, this is partly compensated by the introduction of the ability to ‘carry forward’ unused allowance from the previous three tax years. The allowance figure used is £50,000 per tax year.

There is also a limit on the amount of pension benefits that accrue - this is known as the lifetime allowance and currently stands at £1.8m. Unless protection against this limit was successfully applied for within three years of the rules coming into force in April 2006, any pension funds in excess of the lifetime allowance are subject to an additional tax charge. Pension benefits are ‘tested’ against the lifetime allowance mainly (but not always) when they come into payment - this is known as a ‘benefit crystallization event’ (BCE). Examples of BCEs include taking benefits for the first time, attaining age 75 and transferring to an overseas pension arrangement.

Another important development of the Finance Bill 2011 is the reduction of the lifetime allowance from £1.8m to £1.5m. In the same way it was possible to protect accrued benefits so it is possible to apply to HMRC to ‘fix’ the annual allowance at £1.8m before the reduction applies. The ‘fixed protection’ must be successfully applied for and granted by HMRC prior to the 5th April 2012. Once fixed protection has been granted, no further contributions can be made beyond the 6th April 2012.

Other changes include the removal of the previously unpopular requirement to ‘secure’ a pension income from age 75, thus providing potentially increased flexibility in the way pension benefits may be drawn.

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