Annual allowance reduction will hit thousands more UK savers

Yesterday the government announced it would work with the industry on "alternative ways" to implement pension tax relief restrictions - and would consider reducing the annual allowance to between £30,000 and £45,000 instead. (PP Online, June 22).

However, Towers Watson said people earning significantly less than £130,000 - who would not have been affected by the previous government's plans - could be affected by a reduced annual allowance.

And the consultant warned that lowering the annual allowance to £30,000 could lead to an tax charge for a long-serving final salary scheme members.

This is because, for defined benefit pension schemes, any increase over the course of the year is compared with the annual allowance by multiplying it by a factor of 10.
This would mean a member of a typical final salary scheme on a salary of £80,000 in their 30th year of service who got a 5% payrise would see their pension increase from £40,000 at the beginning of year to £43,400 a year - an increase of £3,400 a year or £34,000 on an annual allowance basis.

Such an individual would be subject to a tax-charge of 40% on the excess £4000 - or a payment of £1600.

However, Towers Watson believes the government's statement that "various features of a much lower annual allowance would need to be revised to ensure it operated fairly and effectively" implies the annual allowance multiple could increase to as much as 15 - meaning even more people would be caught in the net.

It said the changes could also mean trying to reflect the fact that a pension payable from 60 is worth more than a similar pension payable from 65 or the way that defined benefit pensions are generally more expensive to provide for people close to retirement.

Towers Watson head of defined benefit pension consulting John Ball explained: "Dramatically reducing the annual limit on pension saving could catch long-serving employees in final salary schemes who are merely well paid rather than very well paid. That would be another reason for employers who have so far kept these schemes open to existing members to pull the plug. Final salary pensions will not be as useful for retaining key staff if they come with a tax bill attached."

He added: "The government can introduce a simple system or a fair system but not both. A rough and ready approach was fine when hardly anyone needed to worry about the annual allowance but will come under a lot more scrutiny when it is used to calculate tax bills for hundreds of thousands of people."

Ball suggested the last government's plan to make pension schemes pay the tax and deduct it from people's benefits was still under consideration.
He said: "The basic problem is that people will have to pay the tax now but won't see the money they are being taxed on for several years. The temptation may be to make pension schemes act as unpaid tax collectors."

KPMG agreed a reduced annual allowance would mean more people were hit by the measure.UK head of pensions Andrew Cawley said: "Rather than affecting 2% of pension savers, it could now impact many more higher rate tax payers - around 10% of all pension savers."

PricewaterhouseCoopers pensions partner Marc Hommel added: "The annual allowance will need to be reduced to around £30,000, from the current £255,000, a year to raise the required annual tax revenues of £3.5bn, which means more employees will be affected than under the previous government's proposals."

 

 

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• Topics
• United Kingdom
• Government
• Emergency Budget 2010