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Pension action plan

This year’s Budget will be certainly go down as memorable in the pension history book.

The Treasury intends to reduce higher-rate tax relief for those earning at least £150,000. In a double whammy, it also wants to change the rules so employer contributions for this group of people will be taxed as a benefit in kind. The tax relief reduction (down to 20 per cent for those earning more than £180,000) will not take effect until 2011 because of the admin difficulties involved in introducing it, especially for defined-benefit schemes. But the Treasury has also curtailed people ploughing in higher contributions over the next two years and taking advantage of current rules, by introducing a special annual allowance, effectively limiting additional contributions by up to £20,000.

The Budget sets off two trains of thought. The first is advisers need to start pulling together action plans. But they should remember these are only proposals and still subject to change. A useful starting point is to identify which clients they apply to. The question of who earns at least £150,000 is far from clear cut. The amount includes all earned income as well as most savings and investments. It also includes any pension salary sacrifice amount, agreed on or after April 22, to stop new arrangements being set up.

Those affected may need to consider if they have the scope to increase their next two years’ contributions without incurring a tax charge. Advisers and clients will have to think whether they exceed the annual or lifetime allowances.

Another point is to consider if clients have paid a personal contribution very recently. If it would incur the special annual allowance charge, then they may want to ask for a refund. It is up to the scheme administrator to say whether they will allow refunds.

In the future, the highest- earning clients may find their family benefits from a greater level of tax relief if they contribute to a partner’s pension rather than their own.

Advisers will also have to work with trustees to figure out what the new rules mean for the scheme and for the highest-earning members. The Treasury intends to consult on exactly how this will work for defined-benefit schemes but the detail looks daunting.

The second train of thought looks beyond the immediate fallout. What the Treasury has done is to break the A-Day agreement it reached with savers, which was designed to promote long-term pension saving, using the lifetime allowance to prevent abuse by the rich.

The Budget targeted a small minority and fortunately the value of pensions for the vast majority of people is intact but there is a danger that people will only hear the message that the Treasury cannot be trusted not to play about with the long-term rules. That is not conducive to encouraging long-term saving. People need to have confidence in the pension system and certainty so they can plan for the future.

Rachel Vahey is head of pensions development at Aegon

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