UK - Archaic tax rules could prevent firms freezing final salary schemes and replacing them with a stakeholder plan, a pensions lawyer claims.
The problem has been highlighted in an exchange of letters between the Occupational Pension Schemes Joint Working Group and the Inland Revenue.
The problem arises when scheme rules link the pension to an employee’s salary at retirement – not the date when the scheme is closed.
In these cases, the Revenue will not allow contributions into a personal pension either by, or on behalf of, employees who are deferred members of the “frozen” scheme while they remain in service with the same employer.
DLA pensions lawyer James Malcolm said these members would be not be able to save under a personal pension arrangement organised by the sponsoring employer.
Malcolm explained this was because an employee’s service with an employer was deemed to constitute continued participation in a defined benefit scheme irrespective of whether contributions had ceased.
“Continued participation is solely because of the continued salary linkage,” he said.
A number of mid-sized firms are known to be looking at freezing their final salary schemes but these plans may now have to be reconsidered.
But Malcolm said that as the rule only applied to personal pension schemes, firms “freezing” DB plans could opt for a trust-based arrangement as a replacement plan for existing staff.
This artificial distinction may, however, be removed once the new Pensions Bill is introduced and tax legislation is overhauled.
And Simmons & Simmons solicitor Kirsty Bartlett thinks there could be ways around the current tax rules.
She said: “So long as the salary-linked pension is capped at the Revenue maximum on the date of switch to DC benefits, a stakeholder can be provided for future service.”
She added: “This should be a short-term problem in any event as the distinction in this connection between different types of schemes should be removed on the introduction of a single lifetime limit.”
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