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Tax crackdown on final-salary cash incentives

The Revenue is to tax cash incentives offered by employers to persuade workers to transfer out of final-salary pension schemes.

The move has led to predictions that the controversial practice will be wiped out or become less widespread.

Concerns have arisen that lump-sum incentives could lead employees to transfer out of schemes when it would be in their best interests to stay.

Experts, including Faculty of Actuaries president Stewart Ritchie, have also raised concerns that advisers could be blamed if an employee loses out by taking a payment to leave a scheme.

HMRC says these payments will now be subject to income tax and National Insurance. The rules will not apply retrospectively and an exemption will apply to firms that made an offer to members before the announcement.

The move coincides with new guidance from the Department for Work and Pensions requiring employers to give more information to workers about the benefits they will be giving up if they transfer out of a scheme.

Aegon head of pensions development Rachel Vahey says cash sweeteners will still prove appealing for some employees but the combination of the tax charge and increased guidance will discourage most people from transferring.

Vahey says: “On balance, the tax charge will reduce the attractiveness of these cash lumps sums. Employees will also gain a better understanding of what they are giving up so I think the practice will become much less popular.”

Syndaxi Financial Planning managing director Robert Reid says: “Hopefully, this will now bring an end to this distasteful practice.”

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