Final salary scheme pensions will be up to £24,000 a year more than money purchase payouts under the £1.4m savings limit.
The disparity – calculated by Mellon Human Resources & Investor Solutions – relates to the maximum benefit the Inland Revenue will allow defined benefit and defined contribution members to accrue under the proposed lifetime limit.
The maximum pension for a DC member – calculated using the usual factors which determine the open market cost of purchasing an annuity – for a 55-year-old retiree with a 100% widow’s pension is £46,000.
But the maximum pension for a DB member, using the proposed 20:1 ratio, is £70,000 a year – £24,000 higher.
The gap for a 65-year-old retiree with a 100% widow’s pension is £12,000 a year, with the DC member receiving a maximum pension of £58,000.
Mellon head of technical services Kevin LeGrand said the lifetime limit was, ironically, the first piece of pro-DB legislation that the government had proposed for years and it had been forced to introduce it discreetly.
He said: “The Treasury adopted the DB conversion factor, suggested by the Association of Consulting Actuaries, knowing how favourable to final salary scheme members it would be and most likely to placate those disgruntled at the £1.4m cap.”
PricewaterhouseCoopers partner Peter Tompkins said: “There is an uneven playing field which is noticeable when you come closer to retirement.”
But Tompkins argued that the disparity could be resolved.
“To even the field between DB and DC, a DC member could transfer his pension into a final salary plan before retiring, and then benefit from the 20:1 ratio. And the transferred pot is not subject to the incoming Revenue lifetime limit.”
He added: “For tax planners faced with senior executives with too much money in their pension plans, these are the sorts of tricks that will have to be developed.”
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