Up to 100,000 high-earning public sector workers could be better off opting out of generous final-salary pension arrangements as a result of Government pension tax regime reforms.
Under changes announced in October last year, the annual allowance for tax-privileged pension saving will be slashed from £255,000 to £50,000 from April 2011. The lifetime allowance will be reduced from £1.8m to £1.5m from April next year.
Contributions over the ann- ual allowance incur a tax charge of 50 per cent while contributions in excess of the £1.5m lifetime allowance will be taxed at 55 per cent.
Standard Life head of pension policy John Lawson calculates that 70,000 to100,000 people could be better off opting out of public sector schemes and investing contributions elsewhere.
He says: “This is a really big issue and a big opportunity for IFAs in terms of giving fee-based options. But advisers will be very wary of advising clients to opt-out of a final-salary scheme due to FSA concerns. My advice would be for IFAs to simply document the choices but not make a formal recommendation.”
He says public sector workers who are already above the £1.5m lifetime allowance could claim fixed protection on the current level of £1.8m and therefore cease accruals.
AWD Chase de Vere offers financial services for the British Medical Association and head of communications Patrick Connolly says: “Public sector employees in this situation are in a difficult position and it is a difficult and potentially risky area for IFAs to advise on. We would be very nervous about pulling somebody out of a public sector pension scheme because you do not know what future legislation will bring.”
BMA pensions committee chairman Dr Andrew Dearden says: “No one will actually be forced to opt out of the NHS pension scheme but the increased tax bill will mean many doctors will question whether it is worth remaining in it. This is bad news for the scheme, which would be seriously destabilised if high-earners leave, increasing costs for lower-paid workers.”
Richard Jacobs IFA director Richard Jacobs says: “I am seeing increasing situations where I am questioning the validity of remaining in a final-salary scheme as a result of the tax changes.”