The Government’s proposals to restrict tax relief on pensions are inflexible and will hit ordinary workers not just high-earners, warns Mercer.
Under its consultation, the Treasury has called for suggestions on how to limit tax avoidance, particularly with regard to bigger than expected salary increases and enhanced benefits on redundancy and early retirement.
Mercer says it supports the Treasury’s rationale but believes the current proposals could restrict the development of flexible working practices and have severe financial implications for a wide range of employees, not just those targeted by the tax.
Redundant employees are often compensated with a combination of increased cash and pension benefits but Mercer says the Treasury’s proposals would prompt a “double tax hit” on both benefits.
Retirement research group head Deborah Cooper says: “Government proposals mean the taxation of these enhancements will make it financially unviable for an employee to receive benefits at a time when they need them most.”
She says the potential tax should be waived if redundancy terms apply to a certain number or category of employees.
Mercer says employers with an established and pre-funded practice of allowing staff to retire early or for reasons of ill-health should also be exempt from additional tax. It says the factor that is used to test against the annual allowance should take the scheme’s normal practice into account.
Cooper adds: “Where early retirement is a more discretionary option we agree the employees benefiting from this enhancement should, where necessary, pay the appropriate tax charge.”
The firm believes the scope for abuse due to substantial salary rises is the least problematic area of the three, provided the factor used to evaluate DB accrual is designed appropriately.