Following on from our previous article regarding the potential changes to pensions and the tax-related impact this is likely to have on individuals. In this part of the series, we discuss the possibility of the reduction in the annual allowance from the existing threshold of £40,000 to between £30,000-35,000.

Currently individuals can invest up to £40,000 per year (6 April to 5 April) tax free into their pensions. Under certain circumstances, individuals might be able to carry forward any unused proportion of their annual allowance of previous tax years into their current year.  Conversely those who dipped into their pensions before the normal minimum pension age of 55 as well as those who earn an annual income above £200,000 trigger a tapered annual allowance of just £4000. You can find out more about flexibly dipping into your pension in our earlier article.

To highlight the genuine possibility of slashing the annual allowance, in 2010-11 it was set at £255,000 which was considered to excessively favour the rich by enabling them to save considerable sum of money into pensions without facing any tax consequences for the same.

Perhaps the only means by which one may seek to avoid the ramifications of a cut in allowance is to try to use up the any allowances from previous years if applicable since the possibility of doing so is restricted.