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PBR stealth tax will hit DB savers

A quarter of a million high-earning defined-benefit pension scheme members could see their tax bill double as a result of details buried in last year’s pre-Budget report.

Currently, the amount accrued to a pension in any given year is multiplied by 10 to determine whether it exceeds the annual allowance, which at present is £245,000, and tax is payable.

But the Government is set to change this multiple to an age-related factor, with those closer to retirement subject to a higher multiple and liable to more tax. The consultation does not detail which ages will be subject to which multiple but gives an example of a multiple of 23. Standard Life warns that people aged over 50 will be in the firing line.

The Government claims the calculation is more accurate and says it will bring in up to £3bn a year in additional revenue but Standard Life head of pensions policy John Lawson says this is a massive underestimate.

He says: “The Government says they will earn around £3bn from this change but at this rate they will cover the full fiscal deficit. The enormity of the tax charges will be horrendous. This is a sneaky change.”

The move is expected to particularly hit medical professionals in the public sector, such as doctors and dentists.

Lawson says: “The tax charges will be enormous across both sectors but public sector workers will be worse hit because they do not have pension managers.

“In the private sector, employee pension managers will speak to higher-earners and give them the option of taking a bonus or cash instead. Public sector workers will not get that option. Nobody is going to tell these people until the tax demand drops through the letterbox.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Everything this Government does reminds me of the Roman Empires scorched earth policy. If we cant have it we will leave a huge mess behind for those that follow. I’d had to think what would have happened if they had been a Pension Complication Act.

  2. whatever next – a stealth tax on the rich – to reduce
    the full fiscal deficit ?

    what is wrong with traditional method of taxing the poor ?

  3. I have no idea why the Government continues to undermine long term financial planning. Generally, people in their 50s do not have sufficient working life to compensate for unexpected tax hits on their pension planning.
    My husband is a pathologist and academic. For many years he gave up lucrative consultancy fees for the future promise of extra “awards” that were intended to increase his academic income (and therefore pension) in the run up to retirement, now just 3 years away. The extra pension was intended to compensate him for the loss of 20 years consultancy fees. He now wishes that he had taken the cash!

  4. But the logic is correct the effective cost and therefore contribution amount is greater; the closer to retirement someone is – why should a DB scheme be different to a DC scheme?

  5. This goverements idea of taxing hard working people to the hilt will result in our country being the poorest in Europe

    Many of our young intelligent people will go abroad and we will end up as improvished nation full of lazy people expecting hand outs.Gordon brown is turning this country into a stalinist state.The Uk is now a nation of lions led by Donkeys

  6. David Trenner - Intelligent Pensions 28th January 2010 at 2:19 pm

    Anon @1.56 is spot on. To build up my pension by £1,000 p.a. (index linked with 50% widow’s) will cost me more than £30,000. If you believe that high earners should be taxed on employer contributions then Age Related Factors are the only way to do it.

    I wonder why John Lawson has only just noticed this? I also wonder whether John rejoined Standard in time to get back into their Final salary scheme?

  7. On no, having to give something back! Oh dear

  8. I wonder if our illustrious mp’s will find a way around this

  9. The times 10 multiplier always looked especially generous, especially when compared with x 20 used when benefits are crystallised.

    Who am I to argue with John Lawson, but to be caught by this, the DB member is going to not only have high basic pay, likely to have been a long term member of the same scheme, but had a significant increase in pensionable salary in the tax year. Is this really circa quarter of a million people? And are their ultimate benefits likely to be constrained by the LTA, so other salary planning activies would be appropriate anyway.

  10. I blame the FSA!

    (Well, someone had to. I thought it was a given that our lords and masters had to be slagged off in every comments page on Money Marketing!)

  11. Everyone has got to pay for the resolution of the crippling UK debts. The problem seems to be that everyone agrees it has to be done sooner (David Cameron) or later (future members of the opposition) but most have this strange idea that it should not affect them personally. Pension pots are very much in the sights of the Revenue.

    Sorry guys but if you have got it, they want it and will find a way to tax it. You wait till VAT goes up to 20%, that put up the price of your next Bentley.

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