Members of final-salary pension schemes (also known as defined-benefit schemes) that earn higher than average incomes have been warned by financial advisors that they may incur hefty tax penalties for overpaying into workplace investment plans if the proper steps aren’t taken to clarify authentic annual allowances. these warnings come just after the government has adjusted the annual limit on pension contributes from £255,000 to £50,000.
The adjustment is much more problematic for members that have defined benefit (DB) or final-salary schemes, as the calculation of their annual contribution is not simply based on the amount they invest in the plan, but also on a complicated calculation that is set by HM Revenue & Customs. Conversely, members of defined contribution (DC) investment schemes have their annual contributions recorded based simply on amounts paid in each year.
The adjusted contribution limit prevents high earners from taking advantage of workplace plans by making excessive pension contributions. Several prominent executives with well-known companies have already been identified as being at risk of exceeding the new annual allowance. In addition to the new annual pension contribution limit, there will also be a lifetime allowance of £1.8 million to £1.5 million starting in April 2012.
Fortunately, the government is taking a transitional approach to the new annual limits, giving members of final-salary/defined benefit pension schemes until October of 2013 to produce accurate contribution statements for the 2011/2012 tax year. While this adjusted limit should not defer employees from making the most of their pension plans, it should prompt higher earners to pay close attention to their annual contributions in order to avoid unnecessary taxes. Ideally, high earners should seek the consultation of a professional advisor to obtain a more accurate assessment of their current contribution
