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Budget 2011: Flat rate raises range of issues

What did we get in the Budget for pensions? A lot of macro stuff with a lot of further consultation awaited.

Notwithstanding the previously announced increase in state pension age to 66 by 2020, any future changes to SPA will be automatically linked to a regular and independent review of longevity changes. This makes sense and will allow future changes to be efficiently managed. It will, however, require some political input as to how high the SPA can go.

One thing we did expect was the announcement of a green paper on state pension reform. This did not arrive but the Chancellor confirmed the aim of a single flat-rate pension of £140 a week. This will end contracting out for defined-benefit schemes but with it comes a whole raft of issues, including affordability (it has to be cost-neutral), the interaction with current contracted-out benefits and the whole future of means testing.

It was also announced that the Hutton report on public sector pensions has been accepted by the Government.

The one announcement that could have interesting consequences for pensions is the proposed amalgamation of income tax and National Insurance.

Depending on how this is done, there could be some profound effects on the use of salary exchange (or salary sacrifice) as a tax-efficient way of paying pension contributions and, at the other end, presumably pension income will be taxed so as not to include NI.

Merging the two has been discussed many times in the past but always been seen as too complicated. I can see a detailed consultation coming on.

Finally, the review of disguised remuneration and the meas- ures to address tax avoidance are likely to include some so-called “pension arrangements”.


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. It might be useful if the author of this article gave some details on the “profound effects” he anticipates for Salary Sacrifice arrangements. Personally (though I may be missing something) I see none. Money paid into a pension plan instead of being paid as salary (legitimately) escapes assessment for both tax and NIC. So what difference will it make if tax and NIC are combined?

  2. No comment on more pensions discrimination in the budget.

    C/out for Final Salary schemes will end in 2015 when the new flat rate state pension comes into force BUT C/out rebates for defined contribution and personal pensions ends next financial year!

    I will lose nearly £8k in C/out rebates to my PP whilst Final Salary members will enjoy 4 more years lower NI contributions.

    The Govt will save millions by stopping NI rebates early to PPs and C/out defined contribution schemes
    Funny how the word Fairness is often used by the government but this is blatantly unfair.

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