Financial Secretary to the Treasury, Mark Hoban, announced today how the facility for meeting high annual allowance (AA) charges from pension benefits will work in practice, including that the tax should be paid at the point the charge arises.

Schemes will have a considerable amount of time to complete the payment process, with additional flexibility being granted in the first year. Individuals with AA charges above £2,000 will be able to elect for the full liability to be met from their pension benefit. Schemes will be required to operate this facility only where an individual has exceeded the AA outright within that scheme in the relevant year. The Government has given schemes flexibility in how they operate, but is clear that any adjustment to an individual’s pension benefit should be fair to all scheme members.

The Government expects most individuals and employers to adapt their pension saving behaviour to avoid incurring a charge by exceeding the AA, and has put in place measures such as the carry forward of unused allowances to protect individuals further. However, recognising that, in some circumstances, individuals could still see high charges reflecting significant uplift in pension value in a given year, the Government consulted on options to enable individuals to meet these charges from their pension benefits.

The detailed policy specification has been set out in a summary of responses document and draft clauses.

As announced in October 2010, from April 2011 the annual allowance (AA) for tax-privileged pension saving will be reduced from £255,000 to £50,000 and from April 2012 the lifetime allowance will be reduced from £1.8 million to £1.5 million.This is a simpler and fairer approach to making a more sustainable and affordable system of pensions tax relief. The reduction of these allowances will generate around £4 billion annual revenue in steady state, while preserving incentives to save, and lessening the impact on UK business to attract and retain talent.

Mark Hoban said:

"We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit, but not hit those on low and moderate incomes. We have taken a tough, but fair decision.

“The Government believes that our system is fair, will preserve incentives to save and - compared to the last Government’s approach - will help UK businesses to attract and retain talent.”