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Changes boost DB funds but add complexity

Last-minute changes to the Finance Act will allow continued defined-benefit accrual for scheme members with pension funds over 1.5m opting for enhanced protection.

This will allow higher pensions, without the 55 per cent recovery charge being levied for many DB members with pension pots over 1.5m, but adds another layer of complexity to the pension simplification rulebook. Most likely to benefit are staff who are unable to negotiate a cash altern-ative in lieu of future pension accrual and workers taking early retirement.

Scottish Equitable pensions development director Stewart Ritchie says the original proposals were open to all, regardless of the value of the benefits at A-Day, but no further DC contributions or DB accrual would be allowed after A-Day.

Under the new rules, a two-stage calculation is carried out at A-Day. First, pension entitlement at A-Day is calculated by salary and service increased by the greater of RPI or 5 per cent to the retirement date. Second, salary pension is calculated using salary and service to retirement and the higher of these two figures is checked against the benefits that the scheme actually pays.
If scheme benefits are less than the higher of the above two figures, all the benefits can be paid without the lifetime charge. If scheme benefits are higher, enhanced protection would be lost and primary protection applied, which would mean a tax charge on any excess.

Ritchie says: “It is a complex, obscure change but we now believe you can have future accrual without breaking enhanced protection, for example if pay rises are below 5 per cent. But if the pension is managed wrong, then the worker could end up paying a recovery charge.”

Standard Life senior technical manager John Lawson says: “The Government is ensuring that salaries cannot be hiked up just before retirement to avoid paying tax on it.”

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