News

Pensions obfuscation continues

In the Chancellor’s Pre-Budget Report revealed earlier today, the total reversal continued of a policy introduced as recently as 2006 aimed at “pensions simplification”. Bob Hair, Director of Financial Planning (Principal), reviews the implications for pensions.

Today’s announcement builds on Budget 2009, which introduced the loss of personal tax free allowances by £1 for every £2 of adjusted net income above £100,000 from 6th April 2010 (with the effect that for those with an income of £112,950 and above, the personal allowance will now be reduced to nil with a marginal rate of income tax of no less than 60% on that slice of adjusted income falling between £100,000 and £112,950). Budget 2009 also ushered in a new higher rate of income tax of 50% from 6th April 2010 on taxable income above £150,000 – this was left unchanged by today’s announcement. 

Limitations were also introduced in the April 2009 Budget on the amount of higher rate tax relief available on pension contributions, the idea being that higher rate tax relief would taper downwards for income above £150,000 so that once income exceeds £180,000 tax relief on the contributions would be restricted to basic rate (currently 20%).

In an attempt to prevent pension savers making additional contributions before the new rules became effective from April 2011, interim rules were introduced to restrict higher rate tax relief on contributions made on or after 22nd April 2009 which are in excess of the normal pattern of contributions.  Where tax relief is being claimed on pension contributions for either of the interim tax years 2009/10 or 2010/11 and the claimants’ total income for that tax year or any of the two previous tax years exceeds £150,000, higher rate tax relief will only be available on pension contributions up to special annual allowance limit of £20,000, unless the excess over £20,000 is part of the same pattern of normal, regular contributions.

After some lobbying, this £20,000 special annual allowance was lifted to £30,000 where a series of one off contributions had been made which exceeded an average of £30,000 in value over the previous three years.

As if pension savers were not confused enough by these changes, the Chancellor’s announcements in the Pre-Budget Report today have provided further obfuscation.  Even more people will be caught in the net as the starting level of £150,000 will now include any employer contributions or special annual allowance contributions which are made.  With the proviso that no-one with an income of less than £130,000 will have pensions tax relief restricted, the impact is that all those with an income of £130,000 and over will have to tread extremely carefully, so as not to be caught by both the 50% tax rate and the limit on pension tax relief available.

The Government has also announced that the plans for personal accounts, meant to encourage a ‘nation of savers’ have been further pushed back and will now not be fully introduced until April 2017.  Although personal accounts will still have to be set up by April 2012 by employers, the employers will only need to pay in 1% of salary and only increase this to 3% by 2017 (the employee pays 1% to qualify). Lord Turner’s original recommendation were for personal accounts to be in place from 2010, but of course the same commission gave the very strong recommendations that pension saving should be rewarded in an equitable fashion so as to encourage long-term saving – clearly not the case for higher earners who are being now singled out for special treatment.

Those planning to alter their remuneration strategy to include payments to “Employer Financed Retirement Benefit Schemes” (EFRBS) may well find those plans interrupted as certain payments to EFRBS are to be regarded as ‘tax avoidance’ with further legislation brought out to clamp down on their use.  It remains to be seen how this will affect higher earning individuals, but anyone planning to make use of an EFRBS will also need to tread very carefully.

Coupled with the introduction of a potential re-direction of the higher rate tax relief available through gift aid from donors to the charities themselves (see our note on the impact of the PBR on charities), it would appear that the Government’s onslaught on higher earners continues.  It is not yet clear how this will affect the remuneration strategies of top employers, or the activities of wealth creators, but it of course increases the possibility that these enhanced tax rates will be the straw that “breaks the camel’s back” as the pre-election political machinations finally come to a close, and the curtain potentially comes down on the current government’s tenure.

On a positive note, as a resident of Edinburgh, Alistair Darling will know only too well the legendary tales of the grave robbing partnership ‘Burke and Hare’ – presumably he was taking the moral of this story to heart when he drew up his “Dormant Accounts Scheme”. The Pre-Budget Report announced today that this scheme will now be brought forward, although one suitable use of at least 25% of the money raised through this scheme (up to £100 million) will be to help pay for a National “Money Guidance” Scheme from Spring 2010.  The idea is that “orphaned funds” of banks for obsolete accounts unclaimed for a certain time period will be redistributed towards this and other good causes.

The Fred Goodwin effect has certainly taken hold, with the assault today on bankers’ bonuses, and of course there can realistically be little sympathy expected from the electorate at large on the higher taxes, restriction on pension tax relief, taxation of employer pension contributions and the continuing breach of trust on the pension promise for top earners.  Unfortunately all of these matters don’t just hit the rich – they both shake the resolve and trust of those voters for the pensions industry and give people yet more reason to avoid saving. In particular, by deferring the establishment of personal accounts and making the membership of a personal accounts scheme voluntary, the Government has made the savings gap crisis into a potential catastrophe. As for higher earners, they should seek advice on their options - these may be lessened by the Pre-Budget Report but they remain plentiful.