The pensions tax relief changes announced last week show that the new Government has listened to industry comments and has come up with some good news.
But whilst the simplification of pension regulations is always welcome news, there is a risk that the announcement on limiting annual allowance and reducing the lifetime allowance will further dilute the attractiveness of pensions to key decision makers in the business arena.
This in turn, in some cases, may lead to pension provision for UK workforces only managing to meet the minimum legal obligations.
However, the annual allowance at £50,000 will be higher than was suggested in the summer, when it was announced that it might be in the range of £30,000 to £45,000. The Government has even heeded our suggestion to allow unused relief to be carried forward from previous years, for up to three years.
Increasing the multiple for calculating the annual allowance from 10 to 16 will mean that more people will have to pay tax long before they retire. For example, a final salary member who is now on a management wage of £70,000 would only have had to have had a series of modest salary increases before being faced with a £5,000 tax bill. There is a suggestion that the pension scheme will be able to pay for this taxation bill (offsetting the costs from any pension entitlement), which will increase the burden for the administrators.
’The annual allowance at £50,000 will be higher than was suggested in the summer, when it was said that it might be in the range of £30,000 to £45,000’
However, there is good news that deferred pension benefits will be completely excluded from the calculation and that some revaluation of past service benefits will be allowed for active members.
We also welcome the fact that the Treasury has decided to use a flat factor of 16, rather than using age-related factors. This will aid simplicity as well as understanding.
Reducing the lifetime allowance will be costly to introduce as further industry consultation and new layers of protection for existing pension savings will be needed, as well as a further round of advice. Existing protection against the LTA will remain valid, but the maximum pension commencement lump sum will remain linked to the (reduced) LTA.
We note the “high income excess relief charge” will be repealed. This was the legisla-tion introduced by the Labour government, which was need-lessly complicated. We do not have full details yet and must wait for these to emerge.
It is disappointing that there is still no concrete information on EFRBS available , and we need to have more clarity than we have at present.
Advisers remain unable to confirm to clients that any arrangements put in place will provide the benefits intended.
Andrew Roberts is a partner at Barnett Waddingham