Treasury plan would slash DB benefits

5 August 2010 2:00 pm | By Helen Pow

Members of final-salary pension schemes could see the benefits they can build up slashed by a third as a result of Government reform plans on annual allowances.

In last week’s consultation paper on restricting pension tax relief, the Treasury suggested cutting the lifetime allowance from £1.8m to £1.5m.
It says the revenue raised by the move could allow it to index the annual allowance in future.

But, according to Towers Watson, the impact on high -earners in defined-benefit schemes could be magnified because the Government will also look to increase the factor used to calculate benefits from 10 to between 15 and 20.

The firm says the maximum pension that can be built up in a tax-advantaged final-salary scheme could be cut from £90,000 to £60,000 a year.
Senior consultant Mick Calvert says: “That would be the result if the Government decided that each pound of annual income was worth £25 instead of £20 at the same time as shaving £300,000 off the lifetime allowance.

“By freezing the annual allowance, the Government will increase tax revenues by dragging more people into the net.

“The deal ministers seem to be offering could be good news for high-earners whose pension saving is largely ahead of them as the new annual limits will make it difficult for them to build a £1.8m pot in any case. It is bad news for high-earners who have around £1.5m saved already and who had hoped to save more.”

The firm adds that “transitional protection”, which is supposed to avoid taxing the money that people have already saved in pensions, will be a potential minefield if the lifetime allowance is reduced.

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