Fresh Restrictions On Pensions To Hurt Savers

Fresh restrictions on pensions to hurt savers












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Fresh restrictions on pensions to hurt savers

New limits on the amount you can put into your pension to hit hundreds of thousands of people

At present, you can save up to £255,000 tax-free in a pension each year. However, the Treasury is proposing changes which will dramatically cut this to £40,000. Though even this figure is extremely high for the majority of people, those in final salary schemes could be affected as their ‘value’ could go above the new limit, even for those on moderate salaries which could see them hit with a new tax charge.

Experts say that this is another blow for final salary schemes which appear to be on the way out. The changes by the coalition government replace the previous cabinet’s plans to restrict tax relief on pension contributions to those who earn more than £150,000 per annum. Yet pension experts such as Tom McPhail of Hargreaves Lansdown applauded the new proposals saying that it made life easier for pension investors though he did admit that it would destroy final salary schemes.

The Treasury want to cut the annual pension allowance from £255,000 to £45,000 at most and perhaps even as little as £30,000. The problem is that this new proposal could result in someone on a final salary scheme whose entitlement has risen by just £2,000 per annum going over the limit and being forced to pay an additional tax charge. If someone is in a defined contribution scheme, their increased pension fund value is quite straightforward as they receive a yearly statement which tells them the value of their investments. Yet those on final salary schemes have a trickier time as there is a calculation involved which multiplies the amount an individual’s accrued pension gains by 10. In essence, an increase in salary which leads to a person’s pension entitlement rising by £4,000 per year will actually be multiplied by 10 which would put it over the new proposed limit should the government decide to have it below £40,000.

To make matters worse for those on final salary schemes, the government actually wants to increase that multiple to 15 or even 20 which would place even greater restrictions on the annual increase in pensions that can be enjoyed tax-free. Accountant Raj Mody, working for PricewaterhouseCoopers, believes that it is entirely possible for the amount of people who go over the new limit on final salary schemes to double. Mr. Mody gave an example of a 50 year old man who earned £80,000 a year in a final salary scheme receiving a wage increase of 20%. Their joy could be short lived as a tax bill of £10,000 per annum would await them under the proposed changes. He concluded by saying that the new regime will cause more people to drift away from final salary schemes into defined contribution plans which is probably something that the government didn’t intend.

 

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